WHAT HAPPENS
TO LOW–INCOME
HOUSING TAX CREDIT
PROPERTIES AT YEAR
15 AND BEYOND?
U.S. Department of Housing and Urban Development | Office of Policy Development and Research
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WHAT HAPPENS
TO LOW–INCOME
HOUSING TAX CREDIT
PROPERTIES AT YEAR
15 AND BEYOND?
Prepared for
U.S. Department of Housing
and Urban Development
Washington, D.C.
Submitted by
Abt Associates Inc.
Bethesda, MD
Jill Khadduri
Carissa Climaco
Kimberly Burnett
In Partnership with
VIVA Consulting
Laurie Gould
Louise Elving
August 2012
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
ACKNOWLEDGMENTS
e authors of this report acknowledge the contributions and assistance that a variety of individuals and orga-
nizations provided to this study.
We appreciate the guidance and support of the U.S. Department of Housing and Urban Development (HUD)
Government Technical Representative, Regina Gray. We also acknowledge Ben Metcalf of HUD, who assisted
in our eorts to nd respondents for the owner survey.
We thank the syndicators, brokers, state tax credit allocating sta, and Low-Income Housing Tax Credit
industry experts who agreed to be interviewed and provided data for this study. A list of these individuals and
organizations appears at the end of this report. We thank the tax credit property owners who agreed to partici-
pate in the owner survey. eir names are not listed because we told them that information about them and
their properties would not be identiable in the report. We also thank the National Housing Trust for granting
us access to their Qualied Allocation Plan database for our analysis.
At Abt Associates Inc., Meryl Finkel provided advice to the study team and reviewed all study plans and docu-
ments. Stephanie Altho and Ruby Jennings assisted with data collection. Nancy McGarry provided data
programming. We thank them for their work on this study.
DISCLAIMER
e contents of this report are the views of the authors and do not necessarily reect the views or policies of the
U.S. Department of Housing and Urban Development or the U.S. Government.
ACKNOWLEDGMENTS ABSTRACT
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
ABSTRACT
e Low-Income Housing Tax Credit (LIHTC) program has been a signicant source of new multifamily
housing for a quarter century, producing more than 2 million units of aordable rental housing since 1987. In
recent years, LIHTCs have provided funding for approximately one-third of all new multifamily housing units
built in the United States. In the past few years, however, thousands of properties nanced through LIHTC
have become eligible to leave the program, ending rent and income-use restrictions. In the worst-case scenario,
more than 1 million LIHTC units could leave the stock of aordable housing by 2020, a potentially serious
setback to the goal of expanding housing choices for low-income households.
In addition to exploring the issue of whether owners of older LIHTC properties continue to provide aordable
housing for low-income renters, this study examines the factors that aect those owners’ decisions to leave the
LIHTC program and the implications of these departures for the rental housing market. Based on interviews
with owners, with tax credit syndicators and brokers, and with direct investors, the study describes the issues
and decisions that LIHTC property owners confront as their tax-credit projects reach the 15-year mark. e in-
formation from interviews was analyzed in conjunction with tabulations from the U.S. Department of Housing
and Urban Development National LIHTC Database and used to describe what happens to LIHTC properties
as they reach the end of their tax-credit compliance period.
e results demonstrate that most LIHTC properties remain aordable despite having reached and passed the
15-year period of compliance with Internal Revenue Service use restrictions. A limited number of exceptions
are closely related to the characteristics of the local housing market, as well as to events that occur at Year 15
and beyond. Some LIHTC properties will be recapitalized with new tax credits. Others will be repositioned as
market-rate units, especially if they are located in low-poverty areas. Most property owners will confront the
issue of how to meet substantial capital needs while preserving the housing as aordable. Future inquiry
and research should address these issues as compliance periods continue to expire and tax credit properties
continue to age.
ABSTRACT
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
FOREWORD
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
FOREWORD
Enacted in 1987, the Low-Income Housing Tax Credit (LIHTC) program has become the most signicant fed-
eral program for the production and preservation of aordable rental housing in the nation. To date, more than
2 million aordable units have been developed or preserved using the LIHTC, making the tax credit’s portfolio
substantially larger than the public housing stock at any point of that program’s history. At LIHTC’s quarter-
century mark, however, policymakers are facing a growing challenge: tens of thousands of units have reached
or are nearing the conclusion of a compliance period that restricts their aordability to tenants with incomes at
or below 60 percent of Area Median Income. As the United States faces growing rental aordability challenges,
the release of this study that examines the outcomes of LIHTC properties at the termination of their compli-
ance period could not have come at a better time.
e U.S. Department of Housing and Urban Development (HUD) has a mission to serve low-income families
by providing quality aordable housing. Tax credits are administered by the U.S. Department of the Treasury,
however, and HUD has a relatively minor role. Nonetheless, policymakers have been concerned about the
period of time during which LIHTC properties would continue to provide aordable housing. In response,
Congress changed the provision of the law that governs the period of restricted use for LIHTC properties.
us, properties that received LIHTC allocations before 1990 are subject to a 15-year period during which LI-
HTC units must remain aordable. For those properties with allocations in 1990 or later, there is an additional
15-year restricted-use period, for a total of 30 years. However, in some circumstances the owner of an LIHTC
property with a 30-year restriction can elect to leave the program early. Since 2009, 10,634 LIHTC properties
with 374,675 aordable rental units have either reached or passed their 15-year period of restricted use. e
owners of these properties may apply for a new round of tax credits, may continue to operate the property as
aordable housing without new subsidies, or may opt out of the program and reposition the former LIHTC
property as market-rate housing.
HUD commissioned this study, What Happens to Low-Income Housing Tax Credit Properties at Year 15 and
Beyond, to determine whether properties that reached the end of the 15-year compliance period remain aord-
able, the types of properties that do or do not remain aordable, and the major factors by which owners reach
the decision to remain or leave. Based on in-depth interviews with more than 50 owners, tax-credit syndicators,
and brokers, the researchers describe the issues and decisions that LIHTC property owners confront as their
tax-credit compliance period ends.
is study’s exhaustive review of the multifaceted processes that take place before, at, and after the compliance
period is, in and of itself, a major contribution to the slim body of literature that seeks to better understand
the eects of the LIHTC’s simple conception, yet oftentimes complicated execution. e results of the study’s
interviews and data analysis are compelling. For instance, the researchers conclude that most LIHTC properties
remain aordable after having completed the 15-year compliance period. One possible explanation posited by
the authors is that many of these LIHTC property owners are committed to HUD’s mission to expand hous-
ing options for low- and moderate-income families by preserving the aordability of existing units. ere are
indeed exceptions to this rule, however, which this paper attempts to examine. Moreover, it is unclear to what
extent properties remain aordable for the very neediest of families across this country.
FOREWORD
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
Some LIHTC properties will be recapitalized in the near future with new tax credits. Others will be reposi-
tioned as market-rate units in areas where the rental housing market is robust. For the properties that remain
aordable, most owners will confront the issue of how to meet substantial capital needs. What happens to
those properties is beyond the scope of this study, but should be investigated further, particularly as compliance
periods continue to expire.
We trust this study will be of great interest to policymakers and others actively working with the LIHTC
program, including syndicators, owners, investors, nancial institutions, public agencies, and residents who are
interested in evaluating the eectiveness of the program. We also believe that the release of this report comes at
a critical time, as policymakers struggle to nd ways to meet the ever-growing housing aordability challenge.
Raphael W. Bostic, Ph.D.
Assistant Secretary for Policy
Development and Research
FOREWORD TABLE OF CONTENTS
vii
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
TABLE OF CONTENTS
Executive Summary ................................................................................................................................... xi
What Are the Outcomes at Year 15?
.......................................................................................................... xii
Change in Use Restrictions ................................................................................................................. xii
Change in Ownership ........................................................................................................................xiii
Financial Distress and Capital Needs ................................................................................................. xiii
Outcomes After Year 15
............................................................................................................................ xiv
Remain Aordable Without Recapitalization ..................................................................................... xiv
Remain Aordable With New Sources of Subsidy .............................................................................. xv
Reposition as Market Rate ................................................................................................................. xvi
Later Year Properties
................................................................................................................................. xvi
LIHTC Properties at Year 30
................................................................................................................... xvii
Conclusions and Recommendations for Policymakers
............................................................................ xviii
1 Introduction ......................................................................................................................................... 1
1.1 What Is the Low-Income Housing Tax Credit? .................................................................................. 1
e LIHTC Is the Largest Rental Housing Production Program in History .........................................2
LIHTC Diers From Other Rental Housing Production Programs ...................................................... 3
LIHTC Units Substitute for Some Private Multifamily Production ......................................................9
e Financial Health of LIHTC Properties ........................................................................................ 10
1.2 e Early Year LIHTC Program ......................................................................................................12
1.3 Research Questions ..........................................................................................................................13
1.4 Data Sources and Methods ..............................................................................................................15
Quantitative Data ............................................................................................................................... 15
Qualitative Data ................................................................................................................................. 17
Analysis ............................................................................................................................................. 20
2 Ownership and Financing .................................................................................................................. 23
2.1 How Are LIHTC Developments Financed? .....................................................................................23
2.2 Who Owns LIHTC Properties? ....................................................................................................... 25
3 What Are the Outcomes at Year 15? Changes in Ownership ............................................................. 29
3.1 Sales of Limited Partner Interests to the General Partner ................................................................29
Terms of the Sale of Limited Partner Interests to the General Partner .................................................30
Intentions of the General Partner After Year 15...................................................................................32
3.2 Sales of the Property to a New Ownership Entity ............................................................................ 33
Reasons GPs Sell Around Year 15 ....................................................................................................... 33
Most New Owners Are For-Prot Organizations Looking for Cash Flow and Operational Scale ..............34
TABLE OF CONTENTS
viii
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
4 What Are the Outcomes at Year 15? Changes in Use Restrictions ..................................................... 37
4.1 Use Restrictions After Year 15 ..........................................................................................................37
Properties Subject to Use Restrictions From Another Funding Source or Monitoring Agency ............ 37
4.2 e Qualified Contract Process .......................................................................................................38
4.3 Properties No Longer Monitored After Year 15 ...............................................................................39
4.4 Implications for Affordability of Changes in Use Restrictions .........................................................41
Properties With Owners Committed to Long-Term Aordability ....................................................... 41
Properties for Which Maximum Tax Credit Rents Are at or Greater than Market Rents ....................42
5 What Are the Outcomes at Year 15? Financial Distress and Capital Needs ....................................... 43
5.1 Properties in Distress by Year 15 ......................................................................................................43
Financial Performance of LIHTC Properties ...................................................................................... 43
Patterns of Distress at Year 15 ............................................................................................................. 45
5.2 Capital Needs by Year 15 .................................................................................................................46
Condition of the Property When Placed in Service Under LIHTC .....................................................46
Other Factors Aecting Physical Condition by Year 15 ....................................................................... 47
Extent of Capital Needs for Early Year LIHTC Properties at Year 15 ..................................................48
6 Patterns for LIHTC Properties After Year 15 .................................................................................... 49
6.1 Properties Continuing To Operate as Affordable Housing ...............................................................49
Properties Remaining Aordable With Original Owners .................................................................... 50
Properties Remaining Aordable With New Owners ......................................................................... 51
Paying for Renovations Short of Recapitalization With New Tax Credits ........................................... 53
6.2 Properties Recapitalized as Affordable Housing With New Tax Credits ..........................................54
Which Properties Are Most Likely To Seek Additional Tax Credits? ..................................................54
State Policies and Priorities for New Allocations of 9-Percent Tax Credits .......................................... 56
When Does Bond Financing With 4-Percent Tax Credits Work? ....................................................... 57
How Much Rehabilitation Is Done When Properties Are Resyndicated With New Tax Credits? .............. 58
How Common Is Resyndication of LIHTC 15-Year Properties With New Tax Credits? ..................... 59
Major Recapitalization With Other Public Subsidy .............................................................................60
6.3 Properties Repositioned as Market-Rate Housing ............................................................................61
Properties Repositioned rough the QC Process ............................................................................... 61
Properties Repositioned Following Foreclosure ...................................................................................63
Repositioning Is Limited by Market Rents .......................................................................................... 63
Properties No Longer Under Monitoring by HFAs .............................................................................64
6.4 What Will Happen When ese Properties Reach Year 30? ............................................................67
What Will the Outcomes Be as of Year 30? .........................................................................................68
How Will Patterns Shift After Year 30? ............................................................................................... 70
7 Later LIHTC Properties: Will We See the Same Patterns Going Forward? ....................................... 73
TABLE OF CONTENTS TABLE OF CONTENTS
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
8 Conclusions: Policy Recommendations and Suggestions for Further Research ................................. 79
8.1 Policy Recommendations for Maintaining a Stock of Affordable Rental Housing ...........................79
Recommendations for State Housing Finance Agencies ......................................................................80
Recommendations for the Federal Government ..................................................................................83
Recommendations for Advocates, Intermediaries, and Mission-Driven Developers ............................. 85
8.2 Recommendations for Future Research ............................................................................................ 85
Syndicators, Brokers, and LIHTC Industry Experts Interviewed for the Study
...................................... 89
Appendix A: HUD National LIHTC Database: Current Project Data Collection Form ..................... 93
Appendix B: Syndicator and Broker Interview Guides ........................................................................ 97
Appendix C: Owner Survey ............................................................................................................... 109
Appendix D: National Housing Trust Analysis of LIHTC Preservation Policies ............................... 135
Appendix E: HUD National LIHTC Database, Missing Data by Placed-in-service Year ................... 151
References
...............................................................................................................................................153
TABLE OF CONTENTS
x
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
LIST OF EXHIBITS:
Exhibit 1.1 Number and Characteristics of LIHTC Properties Placed in Service, 1987 rough 1994 ........... 13
Exhibit 1.2 Locations of the 37 Owner Interviews .......................................................................................... 20
Exhibit 4.1 LIHTC Properties Placed in Service, 1987 rough 1994, and No Longer Monitored as of 2009 ......40
Exhibit 6.1 States With Properties With a Second LIHTC Allocation ............................................................60
Exhibit 6.2 Presence of Housing Choice Voucher Households in Earliest LIHTC Projects Properties
Placed in Service 1987 rough 1994, Properties Without Rural Housing Service Section 515
Loans or Project-Based Rental Assistance ..................................................................................... 65
Exhibit 6.3 Aordability of Properties in Low-Poverty Census Tracts and No Longer Monitored by HFAs ..........66
Exhibit 6.4 Extended Use Period Expiration of LIHTC Properties Placed in Service, 1990 rough 1994,
With Extended Use Restrictions ................................................................................................... 67
Exhibit 6.5 Characteristics of Early Year LIHTC Properties With Use Restrictions Expiring,
2020 rough 2024 ..................................................................................................................... 69
Exhibit 7.1 Characteristics of LIHTC Properties Placed in Service, 1987 rough 1994
and 1995 rough 2009 ............................................................................................................... 74
TABLE OF CONTENTS EXECUTIVE SUMMARY
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
EXECUTIVE SUMMARY
e Low-Income Housing Tax Credit (LIHTC) program has been a signicant source of new multifamily
housing for more than 20 years, providing more than 2.2 million units of rental housing. LIHTC units
accounted for roughly one-third of all multifamily rental housing constructed between 1987 and 2006. As the
LIHTC matures, however, thousands of properties nanced using the program are becoming eligible to end the
program’s rent and income restrictions, prompting the U.S. Department of Housing and Urban Development’s
(HUD’s) Oce of Policy Development and Research to commission this study. In the worst-case scenario,
more than a million LIHTC units could leave the stock of aordable housing by 2020, a potentially serious
setback to eorts to provide housing for low-income households.
is study demonstrates that the worst-case scenario is unlikely to be realized. Instead, our answer to the question
of whether older LIHTC properties continue to provide aordable housing for low-income renters is a qualied
“yes.” Most LIHTC properties remain affordable despite having passed the 15-year period of compliance
with Internal Revenue Service (IRS) use restrictions, with a limited number of exceptions. ese excep-
tions are closely related to the characteristics of the local housing market, as well as to events that occur at Year 15.
In addition to considering the question of whether older LIHTC properties continue to provide aordable
housing for low-income renters, this study also addresses several other questions:
• How many properties leave the LIHTC program at or after reaching Year 15?
• What types of properties leave, and what types remain under monitoring by
state housing nance agencies (HFAs) for compliance with program rules?
• What are owners’ motivations for staying or leaving?
• What are the implications of properties leaving the LIHTC program for the
rental market? To what extent do properties that leave the LIHTC program
continue to provide aordable housing?
• How do ownership changes and nancing aect whether LIHTC properties continue to provide aordable
rental housing and whether they perform well?
In answering these questions, we focused on properties that would have reached Year 15 by 2009—properties
placed in service under LIHTC between 1987 and 1994. Over the course of this study, we conducted inter-
views with a number of industry participants, including syndicators, direct investors, brokers, owners, and
HFA sta, as well as experts on multifamily nance and the LIHTC program. We also collected property-level
records provided by syndicators, brokers, and owners. Sources of quantitative data used for this study include
HUD’s LIHTC database of properties and units placed in service each year; HUD’s Public Housing Informa-
tion Center database of units rented under the Housing Choice Voucher Program; and a survey conducted for
this study of rents of a sample of LIHTC properties no longer monitored by HFAs.
Our interview sources reported remarkably consistent impressions of the real estate outcomes for Year 15 properties:
• e vast majority of LIHTC properties continue to function in much the same way they always have, provid-
ing affordable housing of the same quality at the same rent levels to essentially the same population, without
major recapitalization. ese properties may have some rehabilitation done at or shortly after Year 15, often
THROUGHOUT THE
REPORT, AFFORDABLE
HOUSING REFERS
TO HOUSING WITH
RENTS AT OR BELOW
THE LIHTC MAXIMUM
FOR THE AREA.
EXECUTIVE SUMMARY
xii
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
in connection with a change of ownership or renancing, but the amount of work done is not extensive
enough to be characterized as recapitalization.
• A moderate number of properties are recapitalized as affordable housing with a major new source of public
subsidy. is new subsidy is most typically new tax credits, either 4 or 9 percent. ese properties usually
undergo a substantial program of capital improvements.
• e smallest group of properties is repositioned as market-rate housing and ceases to operate as affordable. e
risk of this shift occurring is greatest in strong housing markets.
WHAT ARE THE OUTCOMES AT YEAR 15?
Which of the three outcomes will be realized is linked to events that happen at Year 15 and that aect the
likelihood that a property will continue to serve as aordable housing in the years to come. ese outcomes
include whether the property’s use restrictions change, whether the property is sold to a new ownership entity,
and whether the property became nancially or physically distressed before Year 15. e outcome may also be
aected by market conditions where a property is located.
CHANGE IN USE RESTRICTIONS
During the rst 15 years of a LIHTC property’s compliance period, owners must report annually on compli-
ance with LIHTC leasing requirements to both the IRS and the state monitoring agency. After 15 years, the
obligation to report to the IRS on compliance issues ends, and investors are no longer at risk for tax credit
recapture. For properties built before 1990, this requirement also marked the end of the aordability period
required by federal law. Beginning in 1990, federal law required tax credit projects to remain aordable for a
minimum of 30 years, for the 15-year initial compliance period and a subsequent 15-year extended use period.
In addition to complying with federal aordability restrictions, many LIHTC developments, including those
placed in service between 1987 and 1994, are subject to other use restrictions that last well beyond Year 15.
Some sources of such restrictions include mortgage nancing from housing nance agencies or other mission-
oriented lenders; subordinate debt or grant nancing from state or federal sources (including HOME and
Community Development Block Grants) that bear requirements for long-term use restrictions; and land-use
agreements with states or municipalities that have contributed resources to the projects in exchange for long-
term aordability commitments.
Properties subject to an extended LIHTC use restriction may seek to have that restriction removed. e legisla-
tion that extended LIHTC use restrictions from 15 to 30 years also established a Qualied Contract (QC)
process under which owners may request regulatory relief from use requirements any time after Year 15. In the
QC process, the owner requests the state agency to nd a buyer for the property, and the state agency then has
one year to nd a potential buyer who will maintain the property as aordable housing. If the state is unsuc-
cessful in nding a buyer, then the owner is entitled to be relieved of LIHTC aordability restrictions, and
those restrictions phase out over 3 years.
In practice, each state agency can dene its own regulations for implementing the QC, so there are in prac-
tice “fty avors of process.” e process ranges from relatively simple and straightforward to so complex and
EXECUTIVE SUMMARY EXECUTIVE SUMMARY
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
dicult—perhaps intentionally—that the process is essentially unworkable. Furthermore, a number of states
either require or persuade developers seeking LIHTC to waive their right to use the QC process in the future.
In these states, no QC applications are likely to be submitted. erefore, QC sales tend to be concentrated in a
few states and are not common.
CHANGE IN OWNERSHIP
A change in ownership for a LIHTC property can happen at any time. e ownership change is most likely to
take place around Year 15, however, because it is in the interest of limited partners (LPs) to end their ownership
role quickly after the compliance period ends. ey have used up the tax credits by Year 10, and after Year 15
they no longer are at risk of IRS penalties for failure to comply with program rules.
By far the most common pattern of ownership change around Year 15 is for the LPs to sell their interests in the
property to the general partner (GP) (or its aliate or subsidiary) and for the GP to continue to own and oper-
ate the property. is pattern is overwhelmingly the case for properties with nonprot developers, but also true
in many cases of for-prot developers.
e minority of GPs who end their ownership interest at Year 15 almost always do so by selling the property.
Almost always these are for-prot owners selling to for-prot buyers. ese buyers, usually interested in larger
LIHTC properties, appear to be motivated by the economies of scale they can achieve through expanding their
portfolios. Other buyers who are also property managers reportedly may buy LIHTC properties mainly for the
chance to earn management fees, and they may also be interested in smaller LIHTC properties. Still other buy-
ers, the minority, aim to renance and recapitalize a property with a new allocation of LIHTC credits or other
subsidy funds. Owners proceed with these transactions with the goal of earning developer fees and positioning
the property for at least 15 more years of physical and nancial health.
FINANCIAL DISTRESS AND CAPITAL NEEDS
While the strong majority of LIHTC projects operate successfully through at least the rst 15 years after they
are placed in service under the tax credit, some properties fall into nancial distress by the time they reach Year
15. Poor property or asset management practices, a problematic nancial structure, poor physical condition of
the property, and a soft rental market are the most common reasons for the rare instances of failure.
LIHTC properties tend to operate on tight margins both because of the sti competition to obtain these
subsidies initially and because of allocating agencies’ obligation to ensure that they are providing the minimum
amount of subsidy necessary to render the deals feasible. Given these tight margins, the percentage of foreclo-
sures is surprisingly small, in the range of 1 to 2 percent. Both LPs and GPs are anxious to avoid foreclosure,
because it would be considered premature termination of the property’s aordability and subject them to re-
capture of tax credits, with interest, and forfeiture of all future tax credit benets from the property. GPs most
typically, but also investors and even syndicators, may fund operating decits to avoid this consequence.
LIHTC properties are usually required to fund replacement reserves annually, out of operating income, to pay
for capital repairs and renovations. e experts we interviewed agreed that these reserves are usually insucient
after 15 years, however, to cover current needs for renovation and upgrading. Nevertheless, we did not nd a
consensus about the extent of renovation and repair needs across LIHTC properties at Year 15. Probably the
EXECUTIVE SUMMARY
xiv
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
most important determinant of physical condition at Year 15 is whether the property was newly constructed or
rehabilitated when it was placed in service, and, if rehabilitated, the scope of the renovation work that was done
then. If a property was new construction or a gut rehabilitation when initially placed in service under LIHTC,
it is less likely to need signicant upgrades at Year 15 than if it had only moderate renovations initially.
Market conditions may also aect property conditions over time. Properties in strong housing markets that can be
rented at or near the maximum LIHTC rents are more likely to have high occupancy rates and to generate more
operating funds that can be used for maintenance and repairs than can be obtained from housing in a weaker
market, and thus enter Year 15 with fewer deferred repair and maintenance needs. Other factors that may be im-
portant are the target tenant population, property size, and the eciency and skill of the property manager.
e extent and nature of a property’s nancial and physical distress will inevitably shape its Year 15 outcomes.
For example, owners may be more likely to seek a new allocation of LIHTC or other major nancial assistance to
rescue a property with major capital needs, or with a problematic nancial structure. If a property is continuing to
operate at LIHTC rents, it may have to compete for tenants with new LIHTC properties, and the property in bet-
ter physical condition will likely win out. Finally, if properties do fall into foreclosure, they may leave the aord-
able portfolio altogether as a consequence of the property sale to a buyer without aordable housing obligations.
OUTCOMES AFTER YEAR 15
After Year 15, properties take one of three paths: they remain aordable without recapitalization, remain aord-
able with a major new source of subsidy, or are repositioned as market-rate housing.
REMAIN AFFORDABLE WITHOUT RECAPITALIZATION
All the information gathered for this study shows that most LIHTC properties that reached Year 15 through
2009 are still owned by the original developer and that most are operating the properties as aordable housing,
either with LIHTC restrictions in place or with rents that nonetheless are at or below LIHTC maximum levels.
Even for properties subject to extended use restrictions, many owners reported that it simply was not worth
the eort to try to leave the tax credit program through the QC process, because they could not increase rents
outside the program or could increase them only marginally.
At least two types of properties will continue to provide housing at or below LIHTC rents despite the absence
of use restrictions: properties with owners committed to long-term aordability and properties for which
market rents are no higher than LIHTC rents. Nonprot owners usually continue to operate properties as
aordable housing beyond the term of any regulatory requirements because it is their mission to do so. Some
for-prot owners interviewed for this study also described their missions as providing high-quality aordable
housing, long-term.
When a property is not subject to use restrictions and does not have a mission-driven owner, the owner may
still charge rents that are within the LIHTC standard of aordability, because the market will not support
higher rents. Properties in which owners are able to charge rents higher than the LIHTC maximum have to be
in locations where local rental market standards will support higher rents.
EXECUTIVE SUMMARY EXECUTIVE SUMMARY
xv
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
is pattern of properties remaining aordable with their original owners and without major recapitalization
is common in strong, weak, and moderate markets alike. However, the specic nancial condition of proper-
ties may vary. Properties able to achieve high occupancy levels and high rents—even if restricted below market
levels—can generate signicant cash ow and have real market value. So, although it is apparently true that
most post-Year 15 LIHTC developments from the program’s early years have slipped into the mainstream of
properties with rents around the middle of the market, over time these developments will continue to fare quite
dierently depending on where they are located.
Among the minority of LIHTC Year 15 properties sold to new ownership entities, most were sold to buyers
willing to accept the LIHTC aordability restrictions and, at the same time, not buying for the purpose of re-
capitalizing the property with additional tax credits. ese buyers describe the projects’ LIHTC history as more
or less irrelevant to their business decisions and operations, regardless of whether they have to continue comply-
ing with LIHTC rules.
Both continuing and new owners typically renance at Year 15, and low interest rates have enabled them
to fund modest renovations at Year 15 without recapitalizing with new tax credits. Properties needing more
extensive renovation have sometimes been able to obtain other sources of subsidy such as a new soft loan or an
exemption from local real estate taxes.
REMAIN AFFORDABLE WITH NEW SOURCES OF SUBSIDY
Some LIHTC properties are recapitalized as aordable housing at Year 15 or shortly thereafter with a new al-
location of tax credits. In addition to obtaining new tax credits, LPs typically renance the mortgage and may
also obtain new sources of soft debt. e new equity and debt are used to pay for renovation costs that often
are substantial.
When deciding whether to seek a new allocation of tax credits to recapitalize a property—and accept a new pe-
riod of use restrictions—owners weigh a variety of factors. At a minimum, the property must have some capital
needs, because in order to qualify for a new LIHTC allocation, owners must complete rehabilitation of at least
$6,000 per unit per federal regulation (and, in many states, more extensive renovation per state requirements).
Other factors internal to the property include: the need for modernization to compete with new aordable
housing, whether an infusion of additional equity appears to be the only way to bail out a distressed property,
whether it appears that the deal will generate substantial prots for the property’s owners such as new developer
fees, and whether the owners might do even better by selling the property after current use restrictions have
ended rather than extending them further.
State LIHTC policies and priorities also aect the decision to seek a new allocation of tax credits. Some states
reserve 9-percent LIHTCs for creating additional units of aordable housing rather than preserving exist-
ing units. For some properties, 4-percent credits may be a good alternative because they may be more readily
accessed than 9-percent credits for preservation projects. Analysis of the HUD LIHTC database to identify
properties that appear to have been resyndicated with additional tax credits shows a gradual rise in the second
use of tax credits.
EXECUTIVE SUMMARY
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
REPOSITION AS MARKET RATE
By far the least common outcome for LIHTC properties is conversion to market-rate housing. Some properties
are repositioned as market rate after a QC process, although this shift is not common. In cases where properties
are repositioned as market rate, one owner told us that this option avoided the costs of reporting requirements
rather than to raise rents. Some HFAs are using the QC process as a way to help properties in weak housing
markets, such as parts of the Midwest, remain nancially viable. With use restrictions lifted, the owner of the
property is able to reach a slightly expanded pool of potential tenants and, sometimes, to charge rents that are
slightly higher than the LIHTC maximum. For these properties, local conditions will limit rents to aordable
levels for the foreseeable future.
Another outcome sometimes seen for a few LIHTC properties in weak markets is nancial failure. Foreclosure
of the loan on the property is followed by a property disposition by the lender to a new owner who will operate
the property as market-rate housing at higher rents if the market will bear them.
e most likely properties to have been repositioned as unaordable, market-rate housing are properties in low-
poverty locations. We conducted a survey of the rents of a sample of a properties no longer reporting to an HFA
and found that, even for this group of properties that should be at particularly high risk of becoming unaord-
able, nearly one-half had rents less than the LIHTC maximum, and another 9 percent had rents only slightly
more than LIHTC rents (see the exhibit that follows).
Affordability of Properties in Low-Poverty Census Tracts and No Longer Monitored
by Housing Finance Agencies
Property Rents
Greater Than 105 Percent of LIHTC Rent Between 100 and 105 Percent of LIHTC Rent Less Than LIHTC Rent
42% 9% 49%
Source: HUD National LIHTC Database
LATER YEAR PROPERTIES
Approximately 1.5 million housing units, in more than 20,000 LIHTC properties, were placed in service from
1995 through 2009 and will reach their 15-year mark between 2010 and 2024. How likely are those proper-
ties to follow the patterns that we observed around Year 15 for the early year LIHTC properties? e later year
LIHTC properties appear to be at even lower risk of being repositioned as market-rate housing with unaord-
able rents than the early year LIHTCs. A key factor is the very existence of extended use restrictions through
Year 30, with the only possibility of relief being a QC process that some states have required owners to waive,
while others make it procedurally dicult to succeed. Another factor is the much larger percentage of later LI-
HTC properties than early LIHTC properties that have nonprot sponsors. Key dierences between early year
LIHTC properties and later year properties are summarized in the exhibit that follows.
One potentially osetting factor is the lower share of later year properties that combined LIHTC with Section
515 loans from the Rural Housing Service (RHS), which have extended aordability restrictions that are dif-
cult to remove. In addition, higher shares of later year properties are in high-value locations.
EXECUTIVE SUMMARY EXECUTIVE SUMMARY
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
Later year LIHTCs typically have more complex nancial and rent structures, which may mitigate reposition-
ing as market-rate housing. ese structures may also make it more dicult for later year LIHTC properties
to use simpler conventional renancing to join the mainstream of housing with aordable rents. More likely,
many of the later year properties will continue to be part of a self-conscious industry of aordable housing
providers. Although the greater proportion of later year LIHTCs that were either newly built or substantially
renovated when placed in service may suggest a lower need for recapitalization at or around Year 15, both ongo-
ing and new owners of tax credit properties may try to use a second round of tax credits.
Key Characteristics of LIHTC Properties Placed in Service, 1987 rough 1994 and 1995 rough 2009
Early Year Properties:
1987–1994
Later Year Properties:
1995–2009
Number of projects 11,543 20,567
Number of units 411,412 1,521,901
Average project size 36.4 74.8
Construction type
New construction only 56.7% 63.3%
Rehabilitation 43.3% 36.7%
100% 100%
Nonprot sponsor 10.1% 27.6%
RHS Section 515 31.1% 9.0%
Tax exempt bond nancing 3.1% 21.7%
Location type
Central city 46.6% 45.1%
Suburb 25.9% 30.9%
Nonmetropolitan 27.5% 24.0%
100% 100%
Poverty rate of 10 percent or less 24.9% 29.8%
Percent of units with two or more bedrooms 54.5% 64.4%
RHS = Rural Housing Service.
LIHTC PROPERTIES AT YEAR 30
e three patterns observed at or somewhat after Year 15 will continue beyond Year 30: (1) some properties will con-
tinue to provide aordable rental housing, despite the absence of LIHTC use restrictions; (2) some will be recapital-
ized with public subsidies that bring new use restrictions; and (3) some will be repositioned with rents substantially
greater than LIHTC-restricted rents or will no longer be rental housing. e balance among those three outcomes
will shift after Year 30 in favor of the third pattern—repositioning and no longer aordable—but by how much?
Several types of properties will nearly certainly not be repositioned. ese include properties with a mission-
driven owner, a location in a state or city with use restrictions beyond Year 30, and the presence of restrictions
associated with nancing. Of the latter two groups, some of these properties will have agreed to rents less than
the LIHTC maximum for some or all units and may be able to raise rents to something closer to the LIHTC
EXECUTIVE SUMMARY
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
maximum. ese units would still provide aordable housing to households with incomes around 60 percent of
Area Median Income and still potentially be available to households using tenant-based vouchers.
Owners of the remaining properties—for-prot owners of properties with no use restrictions continuing
beyond Year 30—are likely to make a nancial calculation about what to do with the property that depends
on the housing market. e key consideration is whether the location will support market rents substantially
higher than LIHTC rents. Properties likely to no longer provide aordable rental housing are those for which
market equivalent rents—or the value of converting the property to homeownership or commercial use—will
be substantially higher than LIHTC rent. However, the large portion of LIHTC developments that have rents
similar to unrestricted rents at about the middle of the housing market will continue to operate as aordable
housing after the end of their use restrictions.
Some of these properties may have a dicult time producing enough cash ow to meet their operating needs
and remain in even passable condition. Properties in rural areas and in other places with declining populations
are most likely to fall into this category. Unmet capital needs may induce many of these properties to apply to
their HFAs for additional allocations of LIHTC, although how HFAs will respond to this demand and assess
its priority compared with other potential uses of LIHTC is dicult to predict.
CONCLUSIONS AND RECOMMENDATIONS FOR POLICYMAKERS
Most older LIHTC properties are not at risk of becoming unaordable, the notable exceptions being properties
with for-prot owners in favorable market locations. Maintaining physical asset quality turns out to be a larger
policy issue for older LIHTC properties than maintaining aordability. Older LIHTC properties likely will
follow one of three distinct paths: (1) some will maintain their physical quality through cash ow and periodic
renancing, in much the same way that conventional multifamily real estate does; (2) some will maintain their
physical quality through new allocations of LIHTC or another source of major public subsidy; and (3) some
will deteriorate over the second 15 years, with growing physical needs that will ultimately aect their market-
ability and nancial health. is implies that an increasing number of owners, however, will apply for new tax
credit allocations, either for 9-percent tax credits or for bond nancing and 4-percent credits.
Given both of these kinds of needs, state HFAs will come under great pressure as the large stock of LIHTC hous-
ing ages. Restricted by nite resources, state policymakers are going to have to make choices. We recommend that
those choices be made on the basis of a set of guiding principles and on careful examination of the housing mar-
kets in which the older LIHTC stock within their state operates. We suggest that HFAs place the highest priority
on the developments that are most likely to be repositioned in the market—as higher rent housing or conversion
to homeownership or another use. HFAs could benet from additional data and tools from HUD to help identify
the most appropriate properties. Having made a list of high-risk properties, HFAs should then make clear that
resources will be available to preserve those properties as aordable housing—for example, additional allocations
of 9-percent tax credits and other subsidies under the control of the HFA or other state agencies.
EXECUTIVE SUMMARY EXECUTIVE SUMMARY
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
Some properties not at risk of being repositioned should still have high priority for investment in meeting their
capital needs. ese needs include—
• Properties that serve a special-needs population.
• Properties that have committed—or are willing to commit—to rent tranches of units below the LIHTC
maximum, if the property is nancially sustainable over the long term.
• Properties in a neighborhood where substantial public resources have been committed to a multifaceted
revitalization eort and only if rehabilitation of the older LIHTC property is needed to prevent it from
blighting the neighborhood.
In general, state policymakers should recognize that the majority of older LIHTC properties will, over time,
become mid-market rental properties indistinguishable from other mid-market rental housing, and that this
result is good.
We do not recommend that states extend use restrictions beyond 30 years because of the tradeos required.
First, the longer the use restrictions last, the higher the initial subsidy needs to be. Second, under some market
conditions, inexible use restrictions may undermine the goal of preserving aordable housing in good condi-
tion by overly restricting the rental market for those properties.
We also suggest that federal policymakers take actions—specically by revising Qualied Allocation Plan
standards—that will create a high priority for preserving those older LIHTC properties that are at greatest
risk of no longer being aordable, as well as those that serve a special-needs population. Federal policymakers
should also recognize that LIHTC developments at risk of being lost to the aordable housing stock are not
evenly distributed across the United States in proportion to population. Instead, they are most likely to be in
states with high housing costs and limited housing supply, suggesting that LIHTC should be allocated on the
basis of a measure of housing need, rather than per capita. Short of this change, which could weaken support
for LIHTC, an alternative would be to enact a pool of bonus LIHTC funding to be used by the Treasury to
reimburse states that allocate tax credits to carefully dened at-risk properties.
Additional research is essential for making policy about the future of the older LIHTC housing stock. One im-
portant area is research that focuses on the role of LIHTC in creating mixed-income housing, both by making
housing available to low-income renters in locations where it otherwise would not be and by creating housing
that has a mixed-income character within the development itself. Another recommendation is for research to
understand better the role that adding new units of subsidized rental housing such as LIHTC plays in trans-
forming—or weakening—a neighborhood. A better understanding of how to use LIHTC for special-needs
housing and how to best link units with supportive services is also important.
A nal set of issues is suggested by our observation that HFAs and other policymakers will have to make deci-
sions about the LIHTC stock within constrained resources. HUD-sponsored research on the development and
operating costs of LIHTC housing and how they vary around the country could be very useful for informing
HFA policy standards, as well as for allocating tax credits and underwriting specic properties.
EXECUTIVE SUMMARY
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
INTRODUCTION
1
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
1. INTRODUCTION
e Low-Income Housing Tax Credit (LIHTC) program has been a signicant source of new multifamily
housing for more than 20 years. As the LIHTC matures, however, thousands of properties nanced using the
program are becoming eligible to end the program’s rent and income restrictions, prompting U.S. Department
of Housing and Urban Development’s (HUD’s) Oce of Policy Development and Research to commission this
study. In the worst-case scenario, more than a million LIHTC units will have left the stock of aordable hous-
ing by 2020, a potentially serious setback to eorts to provide housing for low-income households.
e research conducted for this study—including interviews with syndicators, LIHTC property owners, and
industry experts, as well as analysis of HUD’s LIHTC database and market research—demonstrates that the
worst-case scenario is unlikely to be realized. Our answer to the question of whether older LIHTC properties
continue to provide aordable housing for low-income renters is a qualied ‘yes.’ Most LIHTC properties
remain aordable despite having passed the 15-year period of compliance with Internal Revenue Service (IRS)
use restrictions, with a limited number of exceptions.
Other research issues addressed by this study include why and how owners and
investors make decisions about the future of their properties, whether properties
still in the LIHTC program are performing well nancially, and the extent to
which properties at around Year 15 seek additional allocations of tax credits.
e remainder of this chapter provides an introduction to the LIHTC and its
role in the multifamily market, comparing it with previous rental production
subsidies. Chapter 2 provides more detail on who owns LIHTC properties and
how they are nanced. Chapters 3 and 4 describe the outcomes for properties
at the end of the 15-year IRS compliance period, including the mechanisms through which properties change
ownership and the extent to which LIHTC properties are no longer monitored by state agencies after Year 15.
Chapter 5 reports our ndings on properties’ nancial and physical condition at Year 15. Chapter 6 describes
three outcome patterns for early year LIHTC properties: remaining aordable without major recapitalization
with new tax credits, recapitalization with new tax credits, and leaving the aordable housing stock. Chapter
7 assesses whether the patterns observed for early year LIHTC properties are likely to continue for properties
placed in service in 1995 and later. Chapter 8 is a conclusion with a discussion of policy implications and rec-
ommendations for future research.
THROUGHOUT THE
REPORT, AFFORDABLE
HOUSING REFERS
TO HOUSING WITH
RENTS AT OR BELOW
THE LIHTC MAXIMUM
FOR THE AREA.
INTRODUCTION
1.1 WHAT IS THE LOW-INCOME HOUSING TAX CREDIT?
e LIHTC was created by the Tax Reform Act of 1986, in part to replace the generous tax benets for aord-
able multifamily housing that were abolished by the same legislation. As suggested by its name, it provides a
subsidy to private developers of aordable housing through the federal tax code. Congress allocates tax credits
to states based on population, in the amount of $2.15 per state resident (as of 2011). In turn, states allocate tax
credits through a competitive process, often administered by the state’s housing nance agency (HFA). Proper-
ties must meet one of two criteria to qualify for tax credits: either a minimum of 20 percent of the units must
be occupied by tenants with incomes less than 50 percent of Area Median Income (AMI), or 40 percent of
units must be occupied by tenants with incomes less than 60 percent of AMI. ese aordability restrictions
2
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
remain in place for a minimum of 15 years. Points are awarded to qualifying development proposals based on
priorities documented in a Qualied Allocation Plan (QAP), which is created individually by each state and
which states revise annually.
e tax credits are provided to developers through federal tax credits received annually for 10 years. Tax credits are set
at either 70 percent of the present value of the qualifying costs (initial development costs, excluding the cost of land
and certain other expenses), which translate to a yearly tax credit of about 9 percent. Credits in the amount of 30 per-
cent of qualifying costs, which amounts to a yearly tax credit of about 4 percent, are distributed outside the allocation
system. ese are discussed in Section 6.2. e amount of the 9-percent credits depends on whether the project is
new construction, substantial rehabilitation, or acquisition and minor rehabilitation of an existing property, whether
it is in a dicult development area (DDA) or qualied census tract (QCT),
1
the share of units set aside for low-in-
come households,
2
and other factors. With boosts in the qualied basis of a project for meeting certain requirements,
the ultimate government subsidy can cover up to 91 percent of construction costs (Eriksen and Rosenthal, 2007).
3
LIHTC developers frequently sell the tax credits to equity investors through a syndicator; syndicators serve as
matchmakers between developers and tax credit investors, who are generally corporations with substantial and
predictable federal tax obligations. Syndication is necessary because the real estate project itself is unlikely to
generate enough federal tax liability for the owner to be able to claim the full value of the tax credits for itself.
Purchasers have sucient tax liability to be able to use the tax credits and may also benet in other ways such
as sharing in cash ow and resale value.
THE LIHTC IS THE LARGEST RENTAL HOUSING PRODUCTION PROGRAM IN HISTORY
Perhaps surprisingly for a government program embedded in arcane IRS regulations (Section 42 of the Internal
Revenue Code), the LIHTC program is an important source of new rental housing. Recently, it has produced
roughly 100,000 units each year. Altogether, about 2.2 million units in some 35,000 separate properties
4
were
placed in service under the program between 1987 and 2009, the latest year for which we have data.
5
As of
2011, the number may be close to 2.4 million units. e LIHTC program has outstripped both public housing
(with 1.1 million units currently existing) and HUD-assisted, privately owned housing (with up to 1 million
units). LIHTC is thus the largest program in U.S. history providing property-based subsidies to rental housing,
and since the early 1990s, has been the only such program developing substantial numbers of additional units.
6
1. As part of the Omnibus Reconciliation Act of 1989, Congress added provisions to the LIHTC program designed to increase production
of LIHTC units in hard-to-serve areas. Specically, the act permits projects located in DDAs or QCTs to claim a higher eligible basis
(130 percent of the standard basis) for the purposes of calculating the amount of tax credit that can be received. Designated by HUD,
DDAs are dened by statute to be metropolitan areas or nonmetropolitan areas in which construction, land, and utility costs are high
relative to incomes, and QCTs are tracts in which at least 50 percent of the households have incomes less than 60 percent of the AMI.
e Housing and Economic Recovery Act of 2008 broadened this authority to allow any building designated by the state housing credit
agency as requiring the increase in credit in order to be nancially feasible to be treated as located in a dicult development area.
2. In reality, nearly all units in tax credit projects qualify as low-income, including 95 percent of units placed in service from 1995
to 2007 (Climaco et al., 2010).
3. e highest subsidies are for properties that receive both 9-percent credits and a 30-percent basis boost for locating in a QCT or a DDA.
4. e term property is used interchangeably with project and development.
5. http://www.huduser.org/portal/datasets/lihtc.html.
6. e HOME program is also used to produce new rental units, although on a much smaller scale. In addition, HOME funding is
often used in combination with tax credits and does not produce units on a stand-alone basis.
INTRODUCTION INTRODUCTION
3
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
Beyond the fact that they now outnumber other government-funded rental units, LIHTC-funded units increas-
ingly represent an important share of all rental housing units. From 1987 to 2006, LIHTC units accounted for
roughly one-third of all multifamily rental housing constructed (Eriksen and Rosenthal, 2010) and as of 2009
made up about 6 percent of all renter occupied housing units.
7
LIHTC DIFFERS FROM OTHER RENTAL HOUSING PRODUCTION PROGRAMS
e tax credit program diers from earlier subsidized rental housing production programs such as the public
housing built from the 1930s to the 1980s and the Section 8 projects built in the 1970s and 1980s, in several
important ways. Tax credit units’ rents are not related to specic tenants’ income. Researchers have pointed
out that, in many of the housing markets and specic locations where LIHTC housing has been built, LIHTC
units compete with market-rate units because rents are quite similar to market rents. LIHTC projects some-
times have layered subsidies, however, and tiers of rents that are lower than either the LIHTC maximum rents
or market rents.
Another programmatic dierence from traditional public housing or Section 8 projects is that the federal role in
tax credit projects is small, and the projects are allowed to fail if their nancial condition is poor. Regardless of
the fact that tax credit projects are subject to market discipline because of their similarity to market-rate hous-
ing, some ineciencies exist in the program. Each of these features of LIHTC is discussed in more detail in the
following section.
LIHTC RENTS ARE NOT BASED ON THE INCOMES OF INDIVIDUAL TENANTS
Tax credit rents are not based on the income of the tenants. Although tax credit units must be aordable to
households at either 50 percent or 60 percent of the AMI, rents do not vary with actual tenant incomes—nor
is rent limited to 30 percent of the tenants’ income, an amount considered aordable. As a result, the program
reaches a somewhat higher income group than previous production programs, unless it is coupled with other
subsidies such as tenant-based housing vouchers. Wallace (1995) estimated that only 28 percent of LIHTC
residents had incomes less than 50 percent of AMI, compared with 81 percent of those who reside in traditional
public housing. at analysis was done at a time when lower tiers of rents in LIHTC properties were less com-
mon than they became later, so the percentage may be higher now.
8
7. Based on a calculation using data on the total number of renter occupied units from the American Housing Survey: http://www.
census.gov/housing/ahs/data/ahs2009.html.
8. Until recently, no systematic data were collected about the income levels of LIHTC tenants across the program. In 2008, HUD
began collecting data on the elected rent/income ceiling for the low-income units in LIHTC projects (either 50 or 60 percent of area
median gross income) and whether any units were set-aside to have rents that are less than the elected rent/income ceiling. (e 2008
collection included properties placed in service through 2006.) In 2010, HUD implemented a new mandate to collect tenant-level
data, including annual income, for tenants residing in LIHTC units. ese tenant-level data are not yet available for analysis.
INTRODUCTION
4
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
LIHTC RENTS ARE SIMILAR TO MARKET RENTS
In some markets, tax credit units are no more aordable than rental units generally. Burge (2011) conducted a
study of LIHTC projects in service as of 2002 in Tallahassee, Florida, considered to be a typical medium-sized
metropolitan statistical area (MSA). Tallahassee has had a weak housing market in recent years, but not dur-
ing the period covered by the study. Using hedonic regression analysis, Burge found that maximum tax credit
rents are initially less than implied market rents because of the properties’ high quality—their newness—when
placed in service. is market advantage eroded, however, as the properties aged and declined in quality during
the 15-year period of aordability required for compliance with the tax code.
is dynamic does not hold in all markets. In strong housing market areas such as parts of the Northeast and
California, tax credit rents tend to be lower than market-rate rents for comparable units and may remain so
over time. Even in strong housing markets, however, this trend depends on the specic location of the LIHTC
property, as the competition for rental housing is for nearby properties, not those in a dierent part of a metro-
politan area or rural region.
Baum-Snow and Marion (2009) analyzed 330 MSAs and also found that, in many cases, LIHTC maximum
rents in 2000 did not result in LIHTC rents that were below unsubsidized rents. e nonbinding eect of the
LIHTC restrictions was the case regardless of the income level of the neighborhood, but especially in low-
income neighborhoods. ey found that, when LIHTC properties were in tracts where 50 percent or fewer
households were LIHTC-eligible, two-thirds of occupied rental apartments had rents below the LIHTC maxi-
mums. When LIHTC properties were in tracts with more than 50 percent of households LIHTC-eligible—
that is, in low-income neighborhoods—82 percent of apartments had rents below the maximum rents.
Both Burge and Baum-Snow and Marion used maximum tax credit rents because they were not able to observe
actual rents paid for LIHTC units. is highlights two points. First, although these authors’ conclusions may
be strictly accurate, the LIHTC units may be providing more aordability than they suggest because rents may
be set below the LIHTC rent ceiling. Second, the LIHTC database does not include information on tenant-
specic rent payments. e lack of data on LIHTC rents actually paid is an important gap in the information
available about these units.
LIHTC UNITS COMPETE WITH MARKET-RATE RENTS
Unlike public housing and project-based Section 8, for which residents pay a percentage of their actual income,
however low, tax-credit units often are in competition with other middle-market rental housing because the
HUD-dened LIHTC maximum rent is often similar to market rent. is competition for renters provides
incentives for owners to manage the projects well (Khadduri and Wilkins, 2008). Because of this competition,
and also because of the design standards required by some HFAs and chosen by some LIHTC developers, tax-
credit properties can be dicult to identify as low-income housing. Under some circumstances, they can create
positive amenity eects such as the revitalization of low-income neighborhoods (Burge, 2011 and Freedman
and Owens, 2011). e need to compete with other housing may also provide an incentive to avoid locating tax-
credit projects in the most undesirable locations, where renters with a range of options would not choose to live.
INTRODUCTION INTRODUCTION
5
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
LIHTC PROJECTS CAN INCLUDE HOUSEHOLDS WITH MIXED INCOMES
Tax-credit projects can sometimes be considered mixed income, because households with incomes close to 60
percent of AMI reside in the same complex as those assisted with Housing Choice Vouchers (HCVs), who usu-
ally have incomes below 30 percent of AMI. is income mixing allows tax-credit projects to serve households
with poverty-level incomes, but also reduces the stigma attached to government-subsidized housing and, therefore,
acceptance of the projects in relatively high-income communities. However, a lack of information about the tax
credit program makes it impossible to assess the extent of income mixing (Khadduri and Wilkins, 2008).
THE FEDERAL ROLE IN PROGRAM DECISIONS IS LIMITED
LIHTC also diers substantially from previous production programs in that the federal role in program deci-
sions is quite limited. As described previously, LIHTCs are allocated and monitored at the state level. Appli-
cations for tax credits almost always exceed the total availability of tax credits, which gives HFAs latitude in
making awards. e role of the federal government is limited to funding the program through the income tax
system and setting some broad parameters that are spelled out in law: maximum rents and income limits, a
minimum percentage of nonprot owners, the percentage of development costs that may be taken as a credit,
and some requirements for QAPs.
9
Because LIHTC is a tax provision rather than an appropriation of funds,
the regulations governing the program have focused on appropriate interpretations of tax policy rather than on
using the program as an instrument of housing policy. e federal government has essentially no role in the
management of tax credit properties.
OWNERS OF LIHTC DEVELOPMENTS BEAR RISKS OF FINANCIAL FAILURE
Correspondingly, the risk that a property will fail is not taken by the federal government, but by owners, inves-
tors and lenders. In some cases, the federal government provides nancing such as Federal Housing Adminis-
tration (FHA) insured loans for tax credit properties, but tax credit properties often rely solely on conventional
nancing in addition to the equity provided by the tax credits. In general, LIHTC projects are at low risk of
failure—at least during the rst 15 years—because of monitoring by the syndicator, investors, and the devel-
oper and perhaps also because of the stringent penalties under the federal tax code for investors and owners
for foreclosure. e state also monitors LIHTC projects and has a particularly strong incentive to ensure the
nancial viability of projects in cases where the HFA has provided some of the nancing. According to a recent
study of a sample of LIHTC projects, the cumulative foreclosure rate through 2006 was only 0.85 percent, and
the annualized foreclosure rate since inception was 0.08 percent (Ernst & Young, 2010).
THE LIHTC PROGRAM DESIGN CREATES BOTH EFFICIENCIES AND INEFFICIENCIES
ere is much debate about using a tax credit as the subsidy mechanism for housing development. Unlike previous
rental production programs in which developers received a lump sum grant, developers of tax credit units receive
the subsidy in an illiquid form and over a relatively lengthy period of time. Because credits are paid out over 10
years, although the investor supplies equity at the beginning of the deal, the tax credit price is discounted. at
9. For example, federal law requires QAPs to give priority to projects that serve the lowest income households and that ensure
aordability for the longest period of time.
INTRODUCTION
6
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
is, $1 of tax credits is worth less than $1 in aordable housing. e program has grown more ecient over time,
however, increasing from below 50 cents per dollar of tax credits in the early years of the program to more than
90 cents per dollar for properties placed in service in 2006 (Ernest & Young, 2010). Discounting the stream of tax
credits over the appropriate 10-year period indicates higher implied prices for tax credits (Cummings and
DiPasquale, 1999). Investors also realize tax benets from depreciation, which aects the cost of the housing
subsidy to the federal government.
Some research suggests that the value of the tax credit subsidy is eroded by the complexity of the subsidy
mechanism, which includes the costs of syndication and of complying with IRS aordability requirements.
Eriksen (2009) analyzed a sample of tax credit properties in California allocated credits from 1999 to 2005 and
found that the sale of developers’ tax credit equity alone—required to realize the full value of the tax credits—
required transaction fees of 15 percent or more during that period. Similarly, the Government Accountability
Oce (GAO) found that syndication costs amount to 10 to 27 percent of total equity raised (GAO, 1997).
Eriksen argues that the calculation of the qualied basis on which the amount of tax credits is awarded provides
an incentive for developers to construct more expensive housing units than they would otherwise. He com-
pared LIHTC housing units in his sample with unsubsidized units built over the same period, and found that
unsubsidized units cost about 20 percent less per square foot to construct. A number of other explanations for
this cost dierential may exist, however, including the prevailing wage laws that may be triggered by sources of
funds commonly paired with LIHTC; carrying costs associated with the long periods of time needed to apply
for and secure tax credit allocations and other nancing; and costs associated with additional regulation, over-
sight, and reporting involved in developing and leasing LIHTC housing.
And on the ip side, other researchers argue that the subsidy mechanism used by the LIHTC creates ecien-
cies. An important example is the delegated compliance monitoring (done primarily by investors and syndica-
tors) and the powerful enforcement mechanism built into the program, the threat of tax credit recapture if the
project is not maintained as aordable. Investment in tax credits has been allowed as a way for banks to meet
their Community Reinvestment Act (CRA) obligations, which in some markets may increase the price of tax
credits to more than their actuarially fair value (Desai et al., 2008). In addition, competition for tax credits may
introduce eciencies as well as allow states to best meet their housing policy goals (Deng, 2005).
LIHTC UNITS ARE AT RISK OF LOSS FROM THE AFFORDABLE HOUSING STOCK
Like earlier housing production programs, units subsidized using the LIHTC may eventually convert to
market-rate housing with higher rents and thereby be lost from the stock of aordable housing. Initial aord-
ability restrictions for the LIHTC program were limited to 15 years, after which the units could convert to
market rate. Previous multifamily production programs have addressed the risk that privately owned, subsidized
units might eventually become unaordable by using grants to cover rehabilitation costs, forgiveness of debt
(when properties had FHA insurance), and increases in the rents paid under subsidy contracts with HUD.
Nonetheless, some properties left the aordable housing stock by prepaying mortgages with use restrictions and
by opting out of their rental subsidy contacts (Finkel et al., 2006; Hilton et al., 2004).
Similar policy concerns about tax credit units motivate this research, but the relatively limited active involve-
ment of the federal government means that federal legislative or regulatory tools for preserving the units as
aordable are limited. Beginning in 1990, federal law required tax credit projects to remain aordable for a
INTRODUCTION INTRODUCTION
7
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
minimum of 30 years, for a 15-year initial compliance period and a subsequent 15-year extended use period.
However, the Qualied Contract (QC) process provides an option for owners to leave the LIHTC program
after 15 years by asking the HFA to nd a buyer, at a formula-determined price, who will agree to maintain the
property under aordability restrictions. If no such buyer is found, aordability restrictions phase out over 3
years. e QC process is described in detail in chapter 4.2.
STATE EFFORTS TO PREVENT TAX CREDIT UNITS FROM REPOSITIONING TO MARKET RATE
Beyond this federally mandated period of aordability, the task of preserving tax credit units as aordable
primarily belongs to the states, and states have responded by taking a variety of measures. California made lon-
ger aordability periods mandatory almost from the beginning of the program, and, by 2001, 41 states either
required or gave preference to projects with aordability periods of longer than 30 years. ese periods extend
from 40 to 60 years and even to perpetuity in the case of Massachusetts, Michigan, and Vermont (Gustafson
and Walker, 2002).
e binding constraint on the period of aordability is sometimes not the federal requirement or state QAPs,
but the conditions imposed by other funders. States, local governments, and nonprots sometimes provide ad-
ditional sources of funding for construction of tax credit properties and often require periods of aordability
longer than 30 years.
Finally, a number of states require tax credit applicants to waive the use of the QC process, ensuring that the
property cannot phase out of the tax credit program as early as Year 18. According to our interviews, some
states also discourage the use of the QC process by making the process complicated and expensive.
OTHER FACTORS AFFECTING THE AFFORDABILITY OF TAX CREDIT UNITS
Other factors also aect whether LIHTC properties will be repositioned to market rate. Many developments
have socially motivated sponsors, often nonprots whose mission is to create and preserve aordable housing in
their neighborhoods. Even if no additional aordability restrictions prevent these organizations from converting
properties to market rate, they typically maintain the units’ aordability to achieve their mission. Federal law
requires that 10 percent of tax credits be allocated to projects with nonprot sponsors. In the rst 2 years of the
LIHTC program, states were not meeting that target but, by 1993, 18 percent of properties had nonprot spon-
sors, and the percentage continued to grow.
Perhaps most important, the dynamics of rental markets aect whether tax credit properties are repositioned.
In many places, rents for tax credit properties—particularly by Year 15, when the properties have aged—may
already be at market potential.
OTHER FEDERAL HOUSING PROGRAMS ARE MORE COST-EFFECTIVE THAN LIHTC IN SOME MARKETS
Given the cost of the LIHTC program to the federal government—roughly $5 billion in annual tax expen-
ditures—surprisingly little research examines its cost-eectiveness. A body of literature beginning with the
Experimental Housing Allowance Program (starting in the 1970s) demonstrates that housing production
INTRODUCTION
8
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
programs are generally more expensive than housing vouchers.
10
However, few studies specically compare the
costs of LIHTC—with its built-in private-market eciencies—to other housing subsidy mechanisms. We are
aware of only two studies, both are described in the following section.
Most recently, Deng (2005) compared newly constructed units placed in service after 1994 with vouchers in six
metropolitan areas. She compared the subsidies required to produce a LIHTC unit with the voucher subsidy re-
quired to house a family with the same target income
11
in the metropolitan area. is research required detailed
review of individual project cost certication forms and project evaluation worksheets to compile the necessary
data on project development costs, which points to an important gap in the data readily available to researchers
on LIHTC projects. Both state and federal subsidies were included in the analysis.
Deng found that the LIHTC units, all subsidized with 9-percent credits, were more expensive than the cost of
vouchers over a 20-year period, but that the size of the LIHTC premium depends on the voucher payment stan-
dard and characteristics of the local housing market as well as local program administration.
Assuming a housing voucher payment standard of 90 percent of Fair Market Rent (FMR), tax credit units are
more expensive than vouchers in all six metropolitan areas. In Atlanta, tax credit units are, on average, six times
more expensive than vouchers. In Miami, tax credit units are 66 percent more expensive than vouchers under
this payment standard. With a higher payment standard (110 percent of FMR), the cost-eectiveness of tax credit
units increases, but are still more expensive than vouchers in four of the six metropolitan areas (Atlanta, Boston,
Cleveland, and New York). With a voucher payment standard of 100 percent of FMR, tax credit units are more
expensive than vouchers in all metropolitan areas, but only by 2 percent in San Jose and 12 percent in Miami.
Housing market tightness did not necessarily drive the cost eectiveness of tax credit units. Tax credit units are
most cost eective in Miami, a balanced market, and in San Jose, a tight market, although the reasons for this
eectiveness are quite dierent in each market. ey are least cost eective in Atlanta, a balanced market, and
Boston, a tight market. Again, the reasons for this are quite dierent in Atlanta and Boston. For example, Deng
attributes the high cost of tax credit units in Atlanta to two primary factors. First, Atlanta’s FMRs are relatively
low, making the comparative cost of vouchers low. Second, the income targets for LIHTC units in Atlanta are
relatively high: 50 to 60 percent of the AMI, a target driven by both program administration and local market
conditions. In this market, most households residing in tax credit units would not qualify for a housing voucher
because they could easily aord market rents (demonstrated by the fact that their minimum rent contributions
are often higher than FMR). e voucher subsidy to these households is thus $0, while tax credit units to house
these families are expensive to build.
On the other hand, LIHTC units were estimated to be roughly equivalent to the cost of vouchers in San Jose, a
tight market. Again, local conditions and program administration are important factors. FMRs are high in San
Jose (higher than in either New York or Boston) and the metropolitan area has a history of high growth rates
in FMRs, both conditions that make vouchers relatively expensive. In addition, LIHTC production costs are
relatively low in San Jose because projects are relatively large (thus achieving economies of scale) and tend to be
developed in suburban areas.
10. ese studies are reviewed by Olsen, 2000, and include HUD 1974; Mayo et al. 1980; Olsen and Barton 1983; and Wallace et al.
1981. More recent studies include McClure 1998; and Shroder and Reiger, 2000.
11. Where the units’ targeted family income was not available, maximum allowable rent was used.
INTRODUCTION INTRODUCTION
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
In New York and Boston, the other tight markets, even new construction LIHTC projects tend to be smaller
and developed in inll areas, increasing the costs of construction and thus reducing the cost eectiveness of tax
credit units. e location of LIHTC projects in these areas is inuenced by these states’ focus on community
revitalization as a secondary goal of aordable housing development.
An earlier study by GAO (2002) compared the cost (both of development and operations over the useful life
of the project
12
) of six federal housing programs and found that LIHTC units are less expensive to the govern-
ment than housing vouchers, but only because tenants—who are relatively higher income households and also
often pay more than 30 percent of their income for rent—pay a larger share of the bill. e total cost of LIHTC
units, considering costs both to the government and to tenants, is higher than the cost of housing vouchers.
is was true in both metropolitan and nonmetropolitan areas, although not in all housing markets. Further,
of the four production programs compared, LIHTC units were the most expensive for both one- and two-bed-
room units in metropolitan areas, although dierences in unit quality could not be controlled for by the study.
e GAO study did not consider other sources of project subsidies such as grants and soft debt from state or
local governments or other sources. e study assumed that capital reserves would be sucient to cover the
properties’ needs for a 30-year period during which the properties would provide housing for low-income
renters. e authors noted that shortfalls in capital reserves, which are historically underfunded by production
programs, would result in costs that were higher than estimated, perhaps by nearly 15 percent.
e present study strongly suggests that reserves for LIHTC properties are indeed often underfunded, as evi-
denced both from the interviews conducted for the study and from the observation that some LIHTC proper-
ties are resyndicated with new allocations of tax credits at Year 15.
LIHTC UNITS SUBSTITUTE FOR SOME PRIVATE MULTIFAMILY PRODUCTION
Unlike earlier public housing and Section 8 developments that were very heavily concentrated in low-income
areas, Eriksen and Rosenthal (2010) point out that LIHTC projects are relatively well-distributed geographi-
cally across the income spectrum. As of 2000, nearly one-half of LIHTC projects (44 percent) were in neigh-
borhoods in either the upper or middle third of their MSA’s income distribution. In comparison, 77 percent
of public housing units were in low-income neighborhoods in 2000. is may indicate that the program is
expanding the stock of aordable housing in higher income neighborhoods.
A point of contention about the LIHTC, however, is whether the properties expand the overall stock of hous-
ing. at is, to what extent do tax credit units built substitute for—or crowd out—other multifamily rental
housing that would have been built without a subsidy. If tax credit units completely replace private units, then
there is no net addition to the housing stock, although the quality of the housing stock may improve. e
substitution of tax credit units for privately funded units stems from their similarity to market-rate units. is
similarity plays the useful role of imposing market discipline on tax credit projects. It also suggests, however,
that in places where tax credit units have rents similar to unsubsidized rental housing, conversion of LIHTC
properties to market-rate properties may not seriously threaten the total number of units that are aordable to
moderate-income households.
12. is period was assumed to be 30 years.
INTRODUCTION
10
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
Subsidized housing generally has been found to substitute for private housing to some degree, so that one unit
of subsidized housing results in less than one unit of additional housing on net (Murray, 1983 and 1999 and
Sinai and Waldfogel, 2002). Research conducted specically on LIHTC developments nds some degree of
substitution for private rental housing, but is mixed in its conclusions on whether tax credit units entirely crowd
out unsubsidized housing. Malpezzi and Vandell’s (2002) study produced point estimates that indicate that
place-based housing subsidies fully crowd out private, unsubsidized construction. eir analysis was at the state
level, however, and they were unable to draw rm conclusions about crowding out because of a small number of
observations (51) and thus large standard errors. Eriksen and Rosenthal (2010) studied tax credit properties us-
ing tract-level data for 1990 and 2000 with more conclusive results. eir estimates indicate that, over a 10-mile
radius area, nearly all LIHTC development is oset by reductions in private unsubsidized construction. ey
suggest that the program may aect the location of aordable housing units more than the overall number of
new housing units developed.
Two recent studies concluded that the degree of crowding out depends on the type of neighborhood where the
housing is built. Eriksen and Rosenthal (2007) examined high- and low-income communities (those in the top
third and bottom third of the income distribution in the MSA) and found that the impact of LIHTC develop-
ments was quite dierent between the two. In low-income communities, the developments had a positive eect.
Within a small area, LIHTC units may actually encourage private construction. e opposite was true in high-
income communities. For those communities, within an area with a 0.5 mile radius, construction of LIHTC
units substituted fully for private, unsubsidized construction. Here LIHTC did not increase the total stock of
rental housing, but instead may have aected who gets to live in those communities.
Baum-Snow and Marion (2009) likewise found that the LIHTC program’s impacts on housing development
dier across neighborhood types. In areas where home prices had been declining, new tax credit units nearby
increased property values. In gentrifying areas, nearby development of tax credit units had a negative impact
on incomes. Consistent with these impacts, they concluded that tax credit units crowd out private multifamily
rental construction much more in gentrifying areas than in declining areas. In declining areas, new tax credit
units increased the overall rental stock by 0.8 units within one kilometer of the project site. In gentrifying areas,
however, each new tax credit unit increases the overall rental housing stock by only 0.37 units.
THE FINANCIAL HEALTH OF LIHTC PROPERTIES
Although very few LIHTC developments fail to the point where they are foreclosed, this does not mean that
tax credit properties are without nancial problems. e physical condition of units is often closely intertwined
with nancial health, as the nancial stability of the property is an important factor in the decisions property
managers make about maintenance and capital improvements.
As Cummings and DiPasquale (1998) point out, investment in a tax credit property is investment in real estate,
and real estate investment is risky. Beyond the typical risks involved in real estate investment, LIHTC projects
face some unique risks, including the rent restrictions, the complexity of the program and its compliance re-
quirements, the special needs of the population being served if projects are designed to serve people with special
needs, such as the homeless or disabled, and other factors related to the design of the tax credit program.
INTRODUCTION INTRODUCTION
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
RENT RESTRICTIONS
e program’s maximum rents restrict the cash ows that can be used to replenish reserves, pay debt, and make
capital improvements to the property. at is the theory behind compensating owners who agree to rent restric-
tions with a development subsidy—the equity raised through the tax credit—that reduces the need for debt.
On the other hand, LIHTC properties in markets where maximum tax credit rents are below market rents may
perform better because other aordable housing is scarce and also because higher incomes in areas such as the
Northeast and California mean that the maximum tax credit rents in these markets may be high relative to
the costs of operating the housing. Ernst & Young (2010) analyzed the operating performance of a sample of
tax credit properties that were placed in service and leased by the end of 2005 and found that properties in the
Northeast and Pacic regions had better median debt coverage and cash ow than properties in the Midwest,
where tax credit rents and market rents tend to be very similar.
PROJECT MANAGEMENT
As in all real estate, the quality of management of LIHTC developments aects their nancial and physical
condition. In addition to facing the typical complexities of multifamily property management, LIHTC project
managers must also screen applicants for compliance with required income levels, report to the HFA, and sub-
mit to property inspections. ey may serve special-needs populations that require additional services.
In addition, the LIHTC program’s design provides incentives for property managers to operate on very thin
margins, with net cash ow frequently near zero. Importantly, LIHTC investors typically do not expect to
receive their returns from cash ows, but from tax-related events. In addition to beneting from the tax credits,
investors may claim deductions for the project’s depreciation and other expenses against other income, and posi-
tive cash ow reduces the value of the depreciation deductions (Usowski and Hollar, 2008). In practice, inves-
tors do not press for positive cash ow, but may instead encourage property managers to use operating income
for property expenses. Some nancing arrangements also provide incentives for partners to keep net income at
or near zero: some soft loans, often provided by states or other government entities, require repayment only if
cash ow is positive (Cummings and DiPasquale, 1998).
Managing the project’s cash ow to achieve this balance adds to the diculty of operating LIHTC projects. If
cash ow is not managed successfully—for example, because cash ow projections made at the time of under-
writing were too optimistic—the resulting negative cash ow may lead the project into a downward spiral of
nancial and physical deterioration. Although tax credit projects typically are of high quality compared with
other nearby market-rate units when placed in service, over time inadequate operating income may cause prop-
erty maintenance and physical condition to suer, leading to increasing diculty in attracting and retaining
tenants.
13
is can lead to a downward spiral by further exacerbating nancial and physical problems as operat-
ing costs increase and rental income decreases (Korman-Houston, 2009).
13. Not surprisingly, the relationship between physical condition and occupancy is strong: one study found that mean occupancy
was higher for properties in excellent condition (97 percent) than those in good and satisfactory condition (95 and 93 percent,
respectively), and occupancy dropped sharply for properties in poor condition (85 percent) (Korman-Houston, 2009).
INTRODUCTION
12
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
FACTORS RELATED TO LIHTC PROGRAM DESIGN
Healthy reserves are particularly important for properties operating on thin margins, and here the design of the
LIHTC program works against the nancial stability of the properties. When LIHTC properties are nanced
and decisions are made about budgeting for operations, reserves generally are budgeted at a higher level than
is typical for conventionally nanced properties. Unlike conventional properties, however, LIHTC properties
are expected to operate for 15 years without raising capital for repairs by renancing. LIHTC reserves—con-
strained by the property’s projected cash ow—generally are not funded at a high enough level to cover capital
needs that arise over that period. e problem of inadequate reserves is exacerbated when negative cash ow
leads to the use of reserves to cover operating costs. Several studies of the nancial health of LIHTC properties
nd that a signicant minority operate with negative cash ow, at least temporarily. More detailed discussion of
this is presented in chapter 5.
e nancial health of LIHTC projects—and the need for reserves—is also aected by production standards,
including how much rehabilitation is done to older properties. In her analysis of Enterprise’s portfolio of tax
credit projects, Korman-Houston (2009) found that rehabilitation projects were more likely to experience
cash ow underperformance than new construction. Rehabilitation projects were also less likely to be in good
condition than new construction projects, suggesting that the initial quality of rehabilitation projects is lower
than that of new construction. For this reason, rehabilitation projects typically contribute more to replacement
reserves than new construction projects (Ernst & Young, 2010).
1.2 THE EARLY YEAR LIHTC PROGRAM
As of 2009, more than 11,000 LIHTC properties, with more than 400,000 housing units, had reached their
15-year mark. ese were properties placed in service under LIHTC between the start of the program in 1987
and 1994. Exhibit 1.1 shows, rst, that the program grew steadily from 1987 through 1994, although it did
not reach the 100,000 units per year that became typical in later years. Average property size grew as well, but
remained relatively small even in 1993 and 1994, with 44 or 45 units per LIHTC development on average in
those years. e percentage of larger properties, those with 100 units or more, also grew steadily, but during
the 1987 through 1994 period less than 9 percent of all properties had that scale. is is reective primarily of
properties placed in service from 1987 through 1992. More than 11 percent of properties placed in service in
1993 and 1994 had at least 100 units.
During the rst 3 years of the program, more than one-half of the properties were rehabilitated existing struc-
tures. By 1990, more than one-half of properties were new. During the period as a whole, about 57 percent of
properties were newly constructed. e share of properties with nonprot sponsors grew during 1987 through
1994, but for the whole period, only about 10 percent had nonprot GPs.
Perhaps the most notable feature of the early year LIHTC program is the substantial use of the program for
housing with Rural Housing Service (RHS) Section 515
14
loans, 31 percent for the period as a whole. In con-
trast, a very small percentage of early year properties were nanced with tax-exempt bonds.
14. Following the Department of Agriculture Reorganization Act of 1994, the USDA’s Oce of Rural Development was created and
took over administration of Farmers Home Administration (FmHA) activities, and the FmHA Section 515 loans became known
as Rural Housing Service (RHS) Section 515 loans.
INTRODUCTION INTRODUCTION
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
Exhibit 1.1. Number and Characteristics of LIHTC Properties Placed in Service, 1987 rough 1994
1987 1988 1989 1990 1991 1992 1993 1994
All
1987–1994
Number of projects 812 1,726 1,784 1,410 1,472 1,425 1,452 1,462 11,543
Number of units 20,781 43,792 54,095 53,722 53,320 52,957 65,289 67,456 411,412
Average project size
and distribution 27.2 26.3 31.5 38.6 36.8 37.3 45.2 46.6 36.4
0–10 units 42.3% 49.6% 44.4% 34.3% 30.7% 30.2% 19.4% 16.7% 33.5%
11–20 units 15.3% 13.3% 10.9% 11.8% 14.1% 14.0% 15.8% 12.2% 13.2%
21–50 units 31.7% 25.5% 29.0% 35.0% 38.3% 36.9% 40.3% 46.0% 35.2%
51–99 units 5.4% 5.5% 8.1% 9.2% 8.6% 10.9% 13.4% 14.0% 9.5%
100+ units 5.2% 6.2% 7.6% 9.8% 8.3% 8.0% 11.2% 11.2% 8.6%
100% 100% 100% 100% 100% 100% 100% 100% 100%
Construction type
New construction only 51.2% 46.5% 49.3% 59.5% 56.5% 65.5% 62.3% 66.0% 56.7%
Rehabilitation 48.8% 53.5% 50.7% 40.5% 43.5% 34.5% 37.7% 34.0% 43.3%
100% 100% 100%
100% 100% 100% 100% 100% 100%
Nonprot sponsor 1.7% 2.7% 8.2% 6.3% 9.8% 14.0% 18.4% 18.1% 10.1%
RHS Section 515 32.1% 23.2% 26.9% 36.5% 33.6% 34.6% 32.1% 33.8% 31.1%
Tax exempt bond nancing 3.2% 2.3% 4.0% 3.7% 3.2% 3.1% 1.8% 3.4% 3.1%
LIHTC = Low-Income Housing Tax Credit. RHS = Rural Housing Service.
Notes: Projects used for analysis include only records with placed-in-service year data. Missing data information is in appendix E.
Source: HUD National LIHTC Database
1.3 RESEARCH QUESTIONS
is is not the rst study to examine the outcomes for LIHTC developments after 15 years. In 2004 and 2005,
Alex Schwartz and Edwin Meléndez interviewed seven LIHTC syndicators and other tax credit experts and,
based on those interviews and on published literature on LIHTC, described the factors that would inuence
what happened to older LIHTC properties over time. ey concluded that “the biggest threat to the long-term
viability of tax credit housing as a resource for low-income households stems less from the expiration of income
and/or rent restrictions and more from the need for major capital improvements. A relatively small segment of
the inventory is likely to convert to market-rate occupancy—primarily housing built during the earliest years of
the program, housing located in the most expensive housing markets, and housing that is not subject to addi-
tional regulatory restrictions” (Schwartz and Meléndez, 2008: 263).
Schwartz and Meléndez emphasized the small portion of the LIHTC inventory for which tax credits were allo-
cated before 1990, before use restrictions that extended through Year 30 were in eect, and the fact that as many
as one-half of those earliest properties were thought to have aordability restrictions other than those mandated
by the LIHTC statute. ey also cited expert opinion that few owners of LIHTC properties for which tax credits
were allocated in 1990 and later would try—or succeed—in opting out of the 30-year use restrictions by asking
the HFA to try to nd a buyer for the property willing to pay a QC price. Finally, they pointed to the very small
fraction of LIHTC properties that are located in census tracts where median rents are greater than the metropoli-
INTRODUCTION
14
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
tan median rent. eir view was that only owners of properties in such locations would have a strong incentive to
leave the LIHTC program to seek market rents (Schwartz and Meléndez, 2008).
e research questions for this study are essentially the same as those suggested by Schwartz and Meléndez,
now examined at least ve years later and after many more properties have passed the 15-year mark:
• How many properties leave the LIHTC program after reaching Year 15?
• What types of properties leave, and what types remain under monitoring by HFAs for compliance with
program rules?
• What are owners’ motivations for staying or leaving?
• How are properties that remain in the LIHTC program performing physically and nancially?
• What are the implications of properties leaving the LIHTC program for the rental market? To what extent
do properties that leave the LIHTC program continue to provide aordable housing?
• How do ownership changes and nancing aect whether LIHTC properties continue to provide aordable
rental housing and whether they perform well?
In answering those questions, we focused on properties that would have reached Year 15 by 2009—that is,
properties placed in service under LIHTC between 1987 and 1994. Given the time frame for data collection for
this study, 2010 and early 2011, we anticipated that we would have data collected from HFAs on the universe of
LIHTC properties through 2009 and that we would have interview-based information on properties that had
reached Year 15 in 2009 or earlier.
We also decided to examine the outcomes after Year 15 primarily for those properties that do not have either
project-based rental subsidies from Section 8 or similar programs or RHS Section 515 loans. ose federal sub-
sidy programs carry other use restrictions and, perhaps more importantly, a dierent set of incentives. Instead,
we focus on properties governed primarily by the rules and incentives of the LIHTC program itself.
Originally, we also decided to focus on properties that had not used LIHTC a second time. As data collec-
tion for the study progressed, however, it became clear that the extent to which LIHTC developments will be
recapitalized and resyndicated with new tax credits is central to the future of LIHTC properties after Year 15.
e further use of tax credits—both those allocated competitively by HFAs and the 4-percent credits that are
available automatically to rental properties nanced with tax exempt bonds—is an important dimension of
how nancing aects the future performance and aordability of LIHTC properties. Schwartz and Meléndez
(2008) noted that additional tax credits were one way to meet an older property’s capital needs, without oer-
ing a view as to how common this would become.
Many of the research questions are about LIHTC properties that are leaving the program, which we dene as
no longer being monitored by an HFA for compliance with LIHTC rules. However, the earliest properties,
those that received LIHTC allocations before 1990, had use restrictions that lasted only 15 years. For those
properties, no longer reporting to an HFA may imply nothing about whether a property continues to pro-
vide aordable housing. Owners may stop reporting simply because they no longer are required to do so. e
properties may have other aordability restrictions, or they may continue to charge rents that are at or below
the LIHTC standard because those are market competitive rents. For properties subject to 30 year use restric-
tions as well, no longer being monitored by the HFA may have ambiguous implications, because some HFAs do
INTRODUCTION INTRODUCTION
15
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
not require reporting between years 15 and 30, instead relying on owners to comply with the use agreements to
which they committed. Despite these ambiguities, we consider properties no longer monitored by HFAs to be
those that potentially have left the LIHTC program and potentially are no longer aordable. erefore, this is a
useful group of properties to examine to answer some of the research questions.
1.4 DATA SOURCES AND METHODS
We used many data sources to answer the study’s research questions. We can divide these data sources into
quantitative data that lend themselves to numerical estimates because they are comprehensive or systematic and
data that may support generalizations but must be considered qualitative.
Sources of quantitative data used for this study are—
• HUD’s LIHTC database of properties and units placed in service each year.
• HUD’s Public Housing Information Center (PIC) database of units rented under the HCV Program.
• A survey conducted for this study of rents of a sample of LIHTC properties no longer monitored by HFAs.
Sources of qualitative data used for this study are—
• Interviews with syndicators of and direct investors in properties that were placed in service from 1987
through 1994.
• Interviews with brokers who handle sales of early year LIHTC properties.
• Property-level records provided by syndicators and brokers.
• Interviews with owners.
• Property-level records provided by owners.
• Interviews with experts on multifamily nance and the LIHTC program.
• Discussions with HFA sta about agencies’ policies and trends seen within the LIHTC program.
QUANTITATIVE DATA
e most comprehensive source of data on LIHTC properties is the HUD database of information collected
from HFAs on the characteristics of LIHTC properties at the time they were placed in service.
15
e data
include the number of units in the property and their distribution by size (number of bedrooms), whether
the property was newly constructed or rehabilitation of existing buildings, whether the sponsor (the General
Partner) was a for-prot or a nonprot entity, whether the property received 9- or 4-percent credits, whether the
property had a Section 515 loan, the street address of the property, and contact information for the owner. e
current data collection form for the HUD LIHTC database can be found in appendix A.
15. e HUD National LIHTC Database and recent reports based on database updates and revisions are available from HUD at
http://www.huduser.org/portal/datasets/lihtc.html.
INTRODUCTION
16
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
e HUD LIHTC database has been a rich source of information on the LIHTC program and has been used
extensively by researchers (Freeman, 2004; Ellen and O’Regan, 2011; McClure, 2006 and 2010; Khadduri,
Buron, and Climaco, 2006; Schwartz and Meléndez, 2008). e precise information on the location of LIHTC
developments has been particularly useful for analyzing how LIHTC relates to housing markets and to racial
segregation. e data have also been useful for describing trends in the LIHTC program over time. (Climaco et
al., 2010, 2009, 2006)
HUD has been collecting data for the LIHTC database every year since the early 1990s on properties placed in
service in the most recent year for which HFA records are complete. When collection of data began, HFAs were
asked to provide data on properties placed in service between 1987 and 1994. HUD has requested updates and
corrections to LIHTC project records through the data collection process, however, those data from the earliest
years were less complete than data for properties placed in service since 1995. erefore, for this study we asked
the HFAs to review the data for early year properties and to add data both for missing properties and for missing
data elements. We asked HFAs to provide data elements that HUD started collecting for the HUD National LI-
HTC Database only in recent years and to clarify the status of the oldest LIHTC properties by signifying proper-
ties no longer being monitored for the LIHTC program, checked if duplicate records existed in the database that
may indicate a new allocation of tax credits, and to identify whether projects have left the program by the QC pro-
cess. Because we wanted to make sure we could analyze separately those properties that did not have Section 8 rent
subsidies, we asked HFAs to add information on that property characteristic, which had not been included in the
early years of the database, and we also matched the addresses of LIHTC developments to HUD administrative
data on Section 8 projects. For agencies that have upgraded their data systems in recent years, data on the earliest
LIHTC projects were readily available, and in fact, many of these agencies had already provided updated informa-
tion through HUD data collection for the LIHTC database. For many agencies, however, data on the early year
properties were not maintained electronically, and the les were in storage and not readily accessible. Because of
those diculties, we were not able to get updated information from all HFAs.
e HUD LIHTC database does not include much information on the nancial characteristics of the property.
For example, no information is available about development costs, nor about the equity that was raised on the
basis of the tax credit, the property’s debt, or the rents actually charged for the units. Recently, HUD began to
request data on the amount of the tax credit allocation, but those data have not been consistently provided for
earlier tax credit properties. No information is available on the property’s performance over time, both because
HFAs often would not have this information and because the data are largely xed at the time the property was
placed in service. erefore, the research questions that relate to the property’s nancial structure and perfor-
mance cannot be answered using this data source.
Furthermore, the HUD LIHTC data are not updated to record changes in ownership over time. is limits
the usefulness of the database for drawing a sample of properties for owner interviews, especially for a cohort
of properties for which the owner contact information is at least 15 years old. Research that used the HUD
LIHTC database as a sampling frame conducted much closer to the time the properties were placed in service
already found much of the contact information was inaccurate. at research also found that many owners who
could be reached refused to agree to be interviewed (Abravanel and Johnson, 1999).
Although in general the HUD LIHTC data reect the property as it was when originally placed in service
under the LIHTC program, there are two exceptions. In recent years, HFAs have been asked to provide a list of
LIHTC properties that they no longer monitor, and those properties are given a ag in the database that identi-
INTRODUCTION INTRODUCTION
17
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
es them as such.
16
erefore, we are able to identify a set of early year properties that may have left the LIHTC
program and may no longer have aordable rents.
Second, the HUD LIHTC data make it possible to identify properties that appear to have used LIHTC for a
second time, by matching the street addresses and other identifying information for properties placed in service
each year to those already in the database. One goal of data collection and updating the database is to account
for properties and units only once. When new data are collected for the database, the records are checked
against the current database for revisions, updates and duplicates. If a new record appears to represent an earlier
record, the earlier record is removed from the database, and the new record has a notation added to indicate the
record was previously in the database with a dierent record identier. e record identier for the database in-
cludes the project placed-in-service year, so a review of the data notation can show whether the project’s placed-
in-service year changed by only one or 2 years or much longer. When the timing suggests that the second
appearance of the property in the database is not simply a correction by the HFA of an earlier data error, we can
infer that the property has been renanced and recapitalized with new tax credits.
To better understand the outcomes for LIHTC properties that are no longer monitored by HFAs and, in
particular, to answer the questions about the extent to which these properties remain aordable, we used two
approaches. Generalizations about the implications for the rental market of properties leaving the LIHTC pro-
gram are based on those eorts.
First, we matched the addresses of properties no longer monitored by HFAs to the addresses of properties that
had at least one tenant using an HCV during 2010. HUD’s PIC database has street addresses for all proper-
ties rented under the voucher program. e premise for this analysis is that, if a property has rents that can be
reached by a tenant with a voucher subsidy, that property has not left the housing stock of rental housing that
can be made available for low-income families and individuals, although they made need rental assistance to
make the housing aordable.
17
Second, we conducted web searches for current rents of a small sample of about 100 properties no longer
monitored by HFAs in locations where we thought market repositioning was most likely: census tracts with low
poverty rates. We compared those rents with the LIHTC maximum rents applicable to the property’s location.
e premise for this analysis is that properties with rents that remain at or below the LIHTC standard have not
left the aordable housing stock. For properties with rents that are greater than the LIHTC standard, we took
into consideration that the property was a mixed aordable and market-rate property. Such properties are fairly
rare in the LIHTC program.
QUALITATIVE DATA
Given the limited information in the HUD LIHTC database on what are the outcomes for LIHTC properties
over time and our conclusion that a representative sample of owners of LIHTC properties could not be found
and persuaded to be interviewed, we decided that the best single source for understanding what the outcomes
are for LIHTC properties over time would be syndicators. at was the same determination made by earlier
researchers who asked similar questions about LIHTC (Cummings and DiPasquale; Ernst & Young; Schwartz
16. e name of the variable is NONPROG.
17. Many tenants may need rental assistance to be able to aord LIHTC units even during the period when the units are subject to
the program’s rent restrictions.
INTRODUCTION
18
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
and Meléndez). Syndicators understand the properties’ ownership and nancing structures, because they helped
create them. ey monitor the nancial performance of the properties on behalf of the limited partner (LP)
equity investors. ey play a central role in property sales or changes in ownership structure. ey are in a
position to provide information about why and how LIHTC properties leave the aordable housing stock and
about the properties’ physical condition and nancial performance. erefore, a major element of the data col-
lection for this study was telephone interviews and site visits with syndicators of early year LIHTC properties,
as well as with some of the companies that had made equity investments in LIHTC properties during that time
period and with real estate brokerage rms that have been active in sales of LIHTC properties to new owners or
ownership entities.
• Seven syndicators participated in interviews and/or site visits for the study. LIHTC investment portfolios for
these syndicators ranged from 1,150 properties to 2,800 properties; ve of the seven had invested in 1,500 or
more properties. All of the syndicators interviewed work across the country. All of the organizations have been
in business since the LIHTC program’s inception—or very shortly thereafter—and thus been associated with
many properties placed in service during the early years of the program, 1987 through 1994.
• Four direct investors participated in telephone interviews or submitted written responses to questionnaires.
All four have been major players in the program since the early days. ree of these direct investors had
amassed LIHTC portfolios of 5,000 or more properties (in at least one case because of acquisition of other
banks and their investments). ese are all nancial institutions or insurance companies.
• ree real estate brokerage rms with specialized practices in post-Year 15 properties participated in inter-
views and/or site visits for the research study. All three operate nationally. According to syndicators and
other industry experts, these three brokers handle a very signicant portion of the country’s current sales of
Year 15 properties that are being sold to new owners. Sales are being made to both individual and corporate
owners. New owners have a variety of motives for buying mature LIHTC properties, as will be discussed
later in this report.
e 11 syndicators and direct investors interviewed for this study during 2010 through 2011 had, among them,
disposed of their interests in roughly 2,000 properties, meaning that they either transferred their limited part-
nership ownership interests or sold the properties to another owner. ey all expected to continue disposing of
their interests as additional properties in their portfolios approached Year 15.
At all these organizations, the research team interviewed senior sta who are knowledgeable about what is
happening to properties as they reach Year 15. LIHTC syndicators and large investors have asset management
sta who are responsible for tracking the performance—always including nancial and usually also physical
condition of LIHTC properties—and representing the interests of the LPs throughout the years that the LPs
hold ownership interests in the properties. ese sta annually review nancial reports on each property, may
inspect it periodically, and may intervene if they think a property is encountering major nancial or physical
problems. Most syndicators and investors with large portfolios also now have asset disposition sta who are
specically responsible for unwinding the LPs’ interests in the property after 15 years.
ese were the kinds of sta interviewed for this report. At a few organizations, interviews also included sta
responsible for investing in new LIHTC properties, sta responsible for inspecting and monitoring the physical
condition of properties, or in-house legal counsel with a broad overview of the organization’s LIHTC invest-
ments. At the brokerage rms, senior brokers who handle the sale of LIHTC properties for both sellers (that
is, existing owners) and buyers (prospective owners) were interviewed. During the site visits, the study team
INTRODUCTION INTRODUCTION
19
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
collected detailed information from each organization’s les on specic LIHTC properties that were placed in
service between 1987 and 1994.
Because these organizations have each seen many properties pass through the Year 15 benchmark, they are able
to generalize about what has happened to properties across the portfolio, as well as provide examples of diverse
types of outcomes.
We estimate that together these organizations have information about a very large share of all the properties
placed in service between 1987 and 1994. e properties we were most likely to miss learning about were small
properties that were not syndicated. Given that most developers would have diculty using the tax credits
without bringing in partners (see chapter 2.2), we believe that such properties comprise a very small minority of
early year LIHTC units.
We also conducted interviews with 13 other experts on the LIHTC program and multifamily nance. We also
discussed with selected HFA sta their observations about what has happened to their earliest projects, includ-
ing whether they noticed properties returning to apply for a new round of tax credits and what policies the
HFAs had about awards of new tax credits for the earliest tax credit recipients.
e interview guides for the syndicator and broker interviews and the site visits can be found in appendix B. A
list of syndicators, corporate investors, brokers, and other experts interviewed for the study can be found in at
the end of this report.
In addition, the research team completed 37 interviews with individual owners of post-Year 15 properties. e
interview was with the General Partner (GP) or, in the case of properties whose initial limited partnerships had
been dissolved, the owner. In one case, the interview was with the LP. ese owners provided the study team
with direct information about what was happening to their properties around Year 15 and prospects for the
property going forward.
is was a convenience sample, based on owners who were identied by syndicators, by HFAs, by the study
team, and by other LIHTC experts and who agreed to be interviewed for the study. It was also a purposive
sample, however, in that we sought to interview owners whose properties illustrated several distinct outcome
patterns that had been described by syndicators, brokers, and other experts and also to interview owners of
properties in dierent parts of the country. Although this is not a large enough sample to provide statistical
information, it enabled the research team to conrm and provide examples of the patterns that were identied
by syndicators, investors, and brokers. e owner interviews included—
• 26 for-prot and 11 nonprot organizations.
• Organizations throughout the country (see exhibit 1.2).
• Owners of properties in diverse kinds of areas: central cities, suburbs, exurban areas, and rural areas.
• Owners in diverse economic markets, ranging from strong markets such as large cities in California and
Massachusetts to weak markets in Ohio and Michigan, and mid-range markets such as Maryland.
• Both developers of the properties originally, when they initial obtained LIHTCs, and more recent purchasers of
properties at least 10 years after they were awarded LIHTCs. We interviewed 27 original and 10 new owners.
INTRODUCTION
20
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
• Both properties that had been newly constructed when rst placed in service (25) and properties that had
been rehabilitations of existing structures (8) (original construction type was not known for four properties).
• Owners whose properties have been continuously in sound nancial condition and those whose properties
have encountered nancial problems that required renancing or sometimes a sale to a new owner before or
around Year 15.
Exhibit 1.2. Locations of the 37 Owner Interviews
Note: e guides for the owner interviews are in appendix C.
Source: Owner interviews
ANALYSIS
e syndicator and broker interviews, together with the interviews of experts, are the basis for most of the
generalizations made in this report about patterns of outcomes for dierent types of properties. e study team
reviewed the les documenting those interviews. We found a lot of consistency in what we were told by repre-
sentatives of dierent organizations.
We also reviewed systematically the documentation of the interviews with owners and the documents on prop-
erty nancing and performance that we received from owners or reviewed during site visits. at information is
used in this report to provide illustrations and examples of the outcome patterns for early year LIHTC develop-
ments. e descriptions in this report of the outcomes of specic LIHTC properties, either from the syndicator
Number of completed owner interviews
property locations by state
1
2
3
INTRODUCTION INTRODUCTION
21
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
and broker les or from interviews with individual owners, have been worded in a way that masks the identity
of specic owners and their properties.
We used the updated HUD LIHTC database to describe the characteristics of properties that were placed in
service between 1987 and 1994 and to compare them with properties placed in service after 1994. is may
help assess whether what the outcomes for the early year properties is a good indicator of the outcomes for
properties that will pass the 15-year mark in the future.
We also used the LIHTC database to show the dierences between properties that no longer report to the
HFAs under the LIHTC program and those that do and to characterize the types of properties that appear
to be using the tax credit for a second time. Finally, we used the data match between LIHTC properties and
HCVs and the survey of rents of properties no longer under monitoring by HFAs to make generalizations about
the extent to which LIHTC properties placed in service in the early years of the program are no longer aord-
able for low-income renters.
INTRODUCTION
22
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
OWNERSHIP AND FINANCING
23
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
2. OWNERSHIP AND FINANCING
2.1 HOW ARE LIHTC DEVELOPMENTS FINANCED?
Conventional multifamily housing is nanced with a combination of debt and equity. Developers will borrow
a portion (say, 75 percent) of the cost of acquiring and building a property, and will provide equity capital for
the balance. Depending on their resources and business arrangements, developers may provide their own equity
capital, or they may secure additional equity capital from other investors.
In exchange for their capital, investors in conventional housing hope to get returns from three sources:
• Cash flow: Cash available to be paid out to owners from rents after all operating expenses and debt service
payments have been covered.
• Resale value: Investors hope that property will appreciate over time, and that they will be able to realize a
prot on the eventual sale of the multifamily development.
• Tax benefits: For conventional real estate, tax benets from the property are generally limited to reductions
in taxable income because of depreciation of the property.
HOW DO TAX BENEFITS FROM DEPRECIATION WORK?
Under the U.S. Internal Revenue Code, depreciation enables taxpayers to convert the up-front cost of
developing a property to tax-deductible expenses over a period of time. For example, suppose a multifam-
ily development is built at a cost of $5 million. Current federal tax law allows residential properties to be
depreciated over 27.5 years, on a straight-line basis. us, each year, the owners can claim 1/27.5 of the
depreciable acquisition and construction costs as an expense—$181,818 per year. is $181,818 is not a
current use of cash: the development costs were paid for up front, from debt and equity, when the project
was built. Nonetheless, the owners can use this noncash expense to reduce their taxable income from the
property. Let’s say, for example, that this property has $500,000 in rent revenues and $250,000 in operat-
ing expenses. Before depreciation, the owners would have to pay income taxes on $250,000 in prots.
After depreciation is taken into account, however, the owner’s taxable income is reduced by $181,818 to
$68,182. In essence, for that year, the owner gets to enjoy $181,818 in cash proceeds on which no federal
income taxes are due.
Depreciation is a deferral rather than an elimination of tax liability. Let’s say that, after operating this
property for 5 years, the owners sell it for $6 million—$1 million more than it cost to develop. Because
they have depreciated the property over time, the book value of the property will be reduced by the
amount of depreciation taken: $181,818 for 5 years, or $909,090 in total. e fact that the property has
depreciated by this amount means that the owners will need to pay taxes not only on the $1 million ap-
preciation in the property’s value, but also on the $909,090 in depreciation that is essentially reimbursed
by the sale proceeds.
OWNERSHIP AND FINANCING
24
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
e depreciation deduction is valuable despite the fact that it defers, rather than eliminates, taxes, for
several reasons:
• First, taxpayers benet from deferral of taxes because of the time value of money; investors benet
from the use of the dollars that would have been paid in taxes during the years intervening before the
property is ultimately sold.
• Second, capital gains, and recaptured depreciation, may be taxed at a lower rate than income; so
when taxes are ultimately paid on sale, the tax burden may actually be less than it would have been if
income had not been sheltered by depreciation.
Although the tax benets associated with real estate ownership are valuable to investors in conventionally
nanced and operated multifamily real estate, these benets are usually of secondary value. Generally, much
larger shares of expected returns for owners of conventional real estate come from cash ow and prots on sale.
Real estate nanced with the LIHTC alters this conventional formulation in a number of ways. e LIHTC
program is designed to motivate developers to build properties with rents restricted to levels aordable to low-
income households. Restricting the rents changes the overall nancing picture in a number of critical ways:
• Properties with restricted rents have less revenue with which to pay a mortgage, and thus can support
smaller amounts of debt than properties at higher market rents.
• Properties with restricted rents will typically generate less cash ow for owners than properties with higher
market rents, reducing a major benet of ownership.
• To the extent that rent restrictions are long term, they will reduce properties’ resale value, reducing another
major benet to owners.
e LIHTC program is designed to counter these eects of reduced rents by providing a tax benet to owners
that compensates for the loss of cash ow and resale prots. Unlike the depreciation deduction (from which LI-
HTC investors also benet), the LIHTC program oers federal tax credits to investors—a at reduction, rather
than a deferral, in the amount of federal income taxes paid. A project with a $5,000,000 development cost
might, for example, be eligible for roughly $420,000 in annual LIHTC credits. at credit entitles the owners
to subtract $420,000 from their federal tax bill every year for 10 years.
is tax benet is of a generous enough size that it motivates owners to contribute much greater amounts of
equity than would be justied by cash ow or resale value alone, compensating for the reduction in debt that
results from lowered rents. Typically, then, LIHTC properties dier from conventionally nanced multifamily
properties as follows—
• A much greater share of the nancing comes from equity: While the capital structure of conventional
residential real estate might have 20- or 25-percent equity and 75- to 80-percent debt, a LIHTC property
might have 50-, 60-, or even 70-percent equity in its capital structure, with one-half or less of development
costs paid for by mortgage debt.
OWNERSHIP AND FINANCING OWNERSHIP AND FINANCINGOWNERSHIP AND FINANCING OWNERSHIP AND FINANCING
25
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
• A much greater share of the benets owing to owners comes from tax benets as opposed to cash ow or
resale value.
• e tax benets going to the owners are largely 10 years of direct tax credits against their income taxes,
with only a minority of tax benets coming from depreciation and other tax losses such as interest owed on
deferred debt, although both kinds of tax benets are available in LIHTC properties.
2.2 WHO OWNS LIHTC PROPERTIES?
To take advantage of the federal tax reductions oered by the LIHTC program, owners need to owe taxes in the
rst place. LIHTC credits are really valuable only to rms that have large and predictable federal tax obligations.
In most cases, real estate developers themselves do not have income that is large enough or predictable enough to
be able to fully use 10 consecutive years of tax reductions worth hundreds of thousands of dollars per project. As a
result, LIHTC projects have almost always been developed using a limited partnership ownership structure.
18
In a typical tax credit project, the real estate will be owned by a limited partnership formed for the single pur-
pose of developing and owning that property. e limited partnership will typically be owned by the combina-
tion of (1) one GP holding a minority interest (1 percent or less) in the limited partnership and (2) one or more
LPs holding the lion’s share of the ownership (99 percent or more). e GP, typically the sponsor/developer or
its aliate or subsidiary, has day-to-day managerial responsibilities for developing and operating the real estate,
completing nancial and tax reporting, and ensuring compliance with use restrictions, as well as seeing to long-
term asset management. GPs make the bulk of their prots through developer fees, most of which are typically
paid after a property is fully occupied and operating at or greater than break-even levels for a specied period
of time. GPs may also have rights to some or all of the property’s cash ow, often through fees structured to
provide incentives for good management of the real estate.
e LPs have restricted responsibilities and managerial rights, although they hold the right to approve any major
alterations to the project or its management team and the right to step in and remove the GP if the development
runs into trouble. LPs get nancial returns primarily from tax benets, including both tax credits and tax losses.
Businesses known as syndicators emerged to broker these arrangements, recruiting investors and matching
them with LIHTC development projects, structuring the investment vehicle to minimize risks and maximize
investor returns, and monitoring the assets over time to ensure that the investors’ returns (largely provided by
tax benets) are preserved.
Most syndicators are private, for-prot rms, working predominantly (but not exclusively) with for-prot devel-
opers.
19
From the early years of the program, however, national nonprot syndicators emerged, with the goal of
raising equity to support the work of nonprot developers of aordable housing. Enterprise Community Invest-
ment, Inc. (formerly known as Enterprise Social Investment Corporation) was founded in 1984; the National
Equity Fund was founded by Local Initiatives Support Corporation (LISC) in 1987. Both rms participated in
18. In more recent years, many LIHTC properties are owned by Limited Liability Companies (LLCs) instead of LPs. ese LLCs
operate in much the same way as LPs, with a managing member playing the role of the GP and limited members in the limited
partner role. is shift to LLCs happened only in the more recent years of the program, so the discussion here will refer to limited
partnerships, but the discussion applies equally to LLCs.
19. For-prot syndicators interviewed for this study reported that 75 to 80 percent of their developers were for-prot and 20 to 25
percent were nonprot entities.
OWNERSHIP AND FINANCINGOWNERSHIP AND FINANCING
26
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
syndicating LIHTC investments from the program’s inception in 1986. ey were created by the parent organi-
zations to support the development of aordable housing by nonprot, often community-based, organizations.
For example, LISC was founded in 1979 by the Ford Foundation to connect community organizations with
the resources to improve their neighborhoods. From the outset, LISC helped provide access to nancing that
might typically not be available from conventional lenders—for example, predevelopment loans for communi-
ty-sponsored real estate. When the LIHTC program began in 1986, LISC created the National Equity Fund
to assemble investment monies from businesses and invest them in community-sponsored LIHTC properties.
Over the years, NEF has expanded its activities to include for-prot sponsored housing, but it has retained a
great interest in nonprot sponsored properties.
State and regional nonprot syndicators began to form a few years later—Merritt Capital in California (1989),
the Ohio Capital Corporation for Housing (1989), and the Massachusetts Housing Investment Corporation
(1990), to name only a few. Currently, a total of 14 state-based and regional nonprot syndicators exist around
the country. Although they invest in both for-prot and nonprot sponsored projects, they have always had a
strong interest in working with projects sponsored by nonprots such as community development corporations.
Interviews with long-time industry participants, along with a series of studies on LIHTC investment perfor-
mance published by Ernst & Young, reveals patterns in LIHTC investment vehicles over time. In the early
years of the program, both private individuals and public corporations invested in tax credit properties. In the
LIHTC program’s rst years, many syndicators created public funds for LIHTC investment. Syndicators mar-
keted these funds to wealthy individual investors, selling fund shares through public oerings. A single public
fund might have dozens or even hundreds of individual investors and would make investments in a portfolio
of aordable housing projects, often spanning the entire country. ese public funds required SEC registra-
tion and reporting. Marketing of LIHTC funds to individuals eectively ended by the early 1990s, however,
because LIHTC program rules severely limited the amount of active income that individuals could shelter with
these tax credits, rules that did not apply to corporate investors. e original 1986 legislation authorizing the
LIHTC program provided some transition rules for projects that were already in development that facilitated
their being marketed to individual investors, but these rules also ended by the early 1990s. Moreover, market-
ing to corporate investors was simpler because SEC registration was not required for institutional funds and
typically such funds had many fewer investors than funds marketed to individuals, so long-term reporting and
fund management were less complex.
Other syndicators recruited corporate investors to purchase the tax credit equity in portfolios of properties,
creating institutional funds. e nonprot syndicators limited their investor recruitment to corporations rather
than individuals from the earliest days of the program, as did some private sector syndicators. e entire
LIHTC equity market shifted sharply towards corporate rather than individual investors in 1993 through 1994
(although one of the syndicators interviewed for this study reported oering private funds as late as 2003).
Changes in the federal tax code in 1993 prompted this shift. First, the LIHTC program became a permanent
part of the tax code, giving corporate investors greater motivation to invest the time and eort necessary to
understanding LIHTC investments. At the same time, the 1993 changes in the tax code also limited individual
taxpayers’ use of passive losses (such as the losses generated by real estate in which the investors do not play an
active managerial role) to oset passive income (that is, investment income earned without the taxpayer’s active
managerial involvement). e passive loss rule did not apply to corporations, so they remained able to fully use
the losses generated by LIHTC investments to oset their taxable income. LIHTC investments thus became
more valuable to corporate investors than to individuals. Finally, syndicators found that working with corpo-
OWNERSHIP AND FINANCING OWNERSHIP AND FINANCING
27
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
rate investors was less labor-intensive: public funds require SEC reporting and ongoing communications with a
large pool of individual investors. Selling LIHTC investments to corporate buyers does not entail SEC report-
ing, and, since institutional funds involve a smaller number of entities making larger capital investments, the
volume of communications required with investors is much smaller.
While many corporations invested in institutional funds through syndicators, several corporations became ma-
jor direct purchasers of LIHTC investments from the early years of the program. Rather than work through a
syndicator, these rms created the internal capacity to reach out to the developer community to acquire limited
partnership interests in aordable housing projects and to underwrite deals, as well as to oversee management
of these investments over time. Direct corporate investors included nancial services rms (such as Fannie Mae,
J.P. Morgan, and Bank of America) and insurance companies (such as Hancock, SunAmerica, and Transamer-
ica/Aegon). Today, nancial services rms and insurance companies are the dominant investors in the LIHTC
market, both through direct investment and working through syndicators. In the program’s early years, a num-
ber of nonnancial rms also made extensive investments in LIHTC properties (for example, Chevron, Clorox,
and Edison). Even today, a scattering of other kinds of businesses invests in LIHTCs, including such rms as
Verizon and Google.
Some LIHTC equity investors have been motivated by community issues, as well as by nancial returns. Banks
around the country are regulated by the federal Community Reinvestment Act, which requires them to provide
some nancial services to their local geographic area. When banks seek federal approval for such actions as cre-
ating new branches or merging with another bank, they are evaluated, in part, by their range of CRA activities.
Investing in LIHTC properties qualies as a CRA activity, so for many large nancial institutions, this type of
investment has become an important way of satisfying CRA requirements while also sheltering income from
federal taxes. is combination of investment and tax shelter is a major reason why nancial institutions have
been among the most frequent LIHTC investors, both through direct investments and syndication funds. Over
the years, increasing numbers of nancial institutions have become interested in this double benet.
OWNERSHIP AND FINANCING
28
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
WHAT ARE THE OUTCOMES AT YEAR 15? CHANGES IN OWNERSHIP
29
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
3. WHAT ARE THE OUTCOMES AT YEAR 15?
CHANGES IN OWNERSHIP
A change in ownership for a LIHTC property can happen at any time. It is most likely to take place around
Year 15, however, because it is in the interest of limited partners (LPs) to end their ownership role quickly after
the compliance period ends. ey have used up the tax credits by Year 10, and after Year 15 they no longer are
at risk that the tax credits will be recaptured because of failure to comply with program rules.
3.1 SALES OF LIMITED PARTNER INTERESTS TO THE GENERAL PARTNER
By far the most common pattern of ownership change around Year 15 is for the LPs to sell their interests in the
property to the General Partner (GP) (or its aliate or subsidiary) and for the GP to continue to own and oper-
ate the property.
One nonprot syndicator estimates that 95 percent of its Year 15 properties are transferred to the original
nonprot developers: indeed, adding these properties to the nonprots’ permanent ownership portfolio is part
of most nonprot syndicators’ missions. ey expect the properties to remain with the nonprot owners in
perpetuity and to continue to be operated as aordable housing.
WHY DO LIMITED PARTNERS WANT TO SELL AT YEAR 15?
e low-income housing tax credits themselves, the greatest benets of ownership, are used up after 10
years of occupancy; the next ve years of ownership oversight allows investors to minimize the risk that
the credits already taken will be subject to Internal Revenue Service (IRS) recapture for noncompliance.
After these 15 years, however, the benets are both gone and safeguarded, because the IRS will no longer
seek recapture of prior tax benets, even if the properties fall out of compliance with LIHTC income
limits or other requirements, regardless of whether the properties are supposed to comply for 30 years. Al-
though some state agencies may have some recourse against owners who violate compliance requirements
between years 15 and 30, their sanctions do not carry the heavy weight of potential IRS tax recapture.
erefore, most investors nd little economic motivation to stay in the deal after Year 15. Syndicators also
are motivated to end the limited partnership to avoid tax reporting and other administrative burdens.
Tax losses might continue to ow for some time after Year 15, but these losses may not be desirable for
corporate investors because they will reduce reported prots. is negative factor will no longer be oset
by the need to protect the tax credit from recapture. All of the syndicators and direct investors inter-
viewed for this study indicated that as a matter of policy, they work to engineer an investor exit as quickly
as possible after the initial 15-year LIHTC compliance period: within a fairly short time after Year 15,
most original investors will have exited the Limited Partner owner role. is exit can be accomplished by
selling the Limited Partner interests (usually to the existing General Partner) or by selling the property
(either to the existing General Partner or to a third party). If the property is sold to a third party, then the
Limited Partnership is dissolved, and both the Limited and General Partners end their ownership roles.
WHAT ARE THE OUTCOMES AT YEAR 15? CHANGES IN OWNERSHIP
30
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
Direct investors and for-prot syndicators also report transferring the majority of properties to the original
developer/GP. While one syndicator estimated that only 60 percent of its dispositions go to the original GPs,
other syndicators and direct investors reported selling 75 to 85 percent of their properties to the original GPs or
their aliated companies.
TERMS OF THE SALE OF LIMITED PARTNER INTERESTS TO THE GENERAL PARTNER
e terms of the sale of the LP interests to the GP make a dierence for the ability of the property to continue
to operate as aordable housing in good condition. If the GP is required to nance a sales price that exceeds the
property’s outstanding debt, that will limit the cash ow that is available for operating the property and meet-
ing its capital needs over time.
In the early years of the LIHTC program, many partnerships were formed under terms that permitted the LPs
to share in the property’s value at the time of sale. In those cases, the exit processes involve an assessment of each
property’s market value, usually under a range of scenarios, and often including a formal real estate appraisal.
Sometimes a brokerage rm is asked to give an opinion of value. If a property has LIHTC income restrictions for
30 years, then these restrictions will be used in assessing market value, although the assessment might also include
what the property might sell for under a Qualied Contract (QC) sale. e assessment may change current
operating assumptions—for example, increasing rents to the maximum allowed under LIHTC if rents are below
that level or assuming more ecient property operations (if plausible), leading to greater cash ow and so greater
market value. New mortgage nancing at current rates is assumed in these valuation analyses.
If a property is determined to have value in excess of outstanding debt, then the LP investors may seek a sale of
the property for the greatest achievable value, which may not be a sale to the GP. e partnership documents
may give the GP a right to consent to any proposed sale, however, and therefore an ability to bargain for a price
less than maximum value.
When properties have real economic value in excess of debt, the terms of a transfer may be subject to considerable
negotiation between the LP and GP. An example is a property with more than 200 units in a strong housing mar-
ket suburban area in the Upper Northwest, where the GP wanted to retain ownership beyond Year 15. After some
discussion, the GP and LP agreed to seek an opinion of the property’s value from a brokerage rm, and they used
the resulting valuation to negotiate a multi-million dollar payment, beyond the value of the debt on the property,
from the GP to the LP. e GP paid for this by renancing the mortgage debt on the property, with the same
national lender that had originally underwritten it, taking advantage of lower mortgage interest rates.
Other partnerships provide a right for the GP to purchase at specied terms. e two national nonprot syndi-
cators have always structured their projects to facilitate a sale to the nonprot sponsor at around Year 15. One
common scenario is for the GP to acquire the LPs’ interests in return for assuming the obligations of all the
existing debt on the property, including both hard and soft (nonamortizing) debt. In nonprot-sponsored deals,
WHAT ARE THE OUTCOMES AT YEAR 15? CHANGES IN OWNERSHIP WHAT ARE THE OUTCOMES AT YEAR 15? CHANGES IN OWNERSHIP
31
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
a right of rst refusal is often granted up front to the nonprot sponsor for the exit price specied in the federal
tax code, which is assumption of outstanding debt plus exit tax liability.
20
e interviews conducted for this study suggest that exit taxes are not a major issue in establishing Year 15 sales
prices. Only one syndicator, one of the nonprot rms, named recovery of exit tax liability as a goal they seek
to achieve for the LP investors.
Negotiations concerning the cost of buying out LP interests may also be extensive if the predened price in the
original partnership agreement is an unattractive proposition for a GP who thinks the property is not worth the
stated amount. In other situations, the GP buyout price may be ambiguous in the initial documents or subject
to interpretation and assessment (for example, if the right of rst refusal is for the property’s current market
value). ese situations can also lead to long negotiations between the two partners.
Many original GPs, both nonprots and for prots, are in fact able to buy out LP interests for little or no
consideration beyond assumption or repayment of outstanding debt. Syndicators indicate that most LIHTC
properties have little value beyond debt at the end of Year 15: one syndicator claims that 80 percent of their
properties are in this category. Other industry experts place this percentage even higher. e absence of value
in excess of debt is particularly likely to be the case for projects with soft loans that remain unpaid during the
compliance period, since these soft loans grow in value by virtue of accruing interest.
A transfer of LP interests to the GP for outstanding debt can occur in both strong and weak markets. For
example, one project in the Upper Midwest was viewed by both parties as being in a weak market and having
debt that exceeded the project’s value. Before Year 15, the GP had fed the property nearly $500,000 to keep it
going. By selling it to the GP for $1, the limited investor ended the risk that it, too, might have to invest more
capital to keep the housing out of foreclosure. A property in a strong, stable market area of a major California
city oers a market contrast, but with the same result. is 119-unit property, sponsored by a nonprot and
with a large amount of soft debt and a service population of homeless individuals, was acknowledged by both
the LP and the GP to have debt in excess of its market value based on a real estate appraisal. e LP, therefore,
agreed to transfer its interest to the GP for $1.
In another example, also of a property in a strong housing market in California, the GP and LP agreed that the
value of the project was less than the debt on the 180-unit property. e LP interest was transferred in exchange
for the GP assuming the debt. In addition, per the partnership agreement, $40,000 in replacement and operat-
ing reserves was distributed to the LP with the dissolution of the partnership. is was because it was not neces-
sary for the GP to contribute to the capital account to maintain the property during the life of the partnership,
so the GP did not have enough credit in the capital account to keep the reserves.
20. Section 42 of the federal tax code provides the option for nonprot sponsors to have a right of rst refusal to purchase a LIHTC
property at the end of the compliance period for a specied price, which includes the assumption of all outstanding debt, plus
payment of any investor exit taxes. us nonprot syndicators tended to anticipate back-end sale at this price in the deals’
initial structure from the outset of the LIHTC Program. Over time, as more syndicators and investors have worked on more
nonprot sponsored deals, this option has been more commonly included in their initial partnership agreements. If a partnership
agreement contains this option, then the transfer of a property to full control of a nonprot-owned GP may be quickly discussed
and concluded between the GP and LP.
WHAT ARE THE OUTCOMES AT YEAR 15? CHANGES IN OWNERSHIP
32
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
WHICH PROPERTIES ARE LIKELY TO HAVE EXIT TAX LIABILITY?
Investors will face exit taxes on sale if the tax losses they have been allocated exceed their invested capital
and if they have used those losses along the way to reduce their taxable income. In general, bond deals are
more likely to have issues with exit taxes. Exit taxes are dicult to predict for the funds that were syndi-
cated to individual investors, both because individuals’ tax situation may have uctuated during the years
they held the investment and because of changes to the federal tax law in 1993. at year, new federal tax
law said that individual taxpayers could only use passive losses (such as those generated by a real estate
investment) against passive income (generated by other investments in which the individual does not play
an active role such as other real estate). is change meant that LIHTC investments by individuals could
no longer shelter ordinary or earned income. Since many individual investors were unable thereafter to
fully use the losses generated by their tax credit investments, the ultimate sale of those assets would actu-
ally produce a tax benet by releasing suspended losses.
Investors most likely to face substantial exit tax liability are corporate investors who have used all of the
tax losses and who have invested in properties where losses are particularly large because, in addition to
depreciation, the properties have soft loans with large amounts of accruing interest. Interest on real estate
loans becomes an operating expense or loss for tax purposes. Less commonly, large tax losses are generat-
ed during the life of a LIHTC property because of deeply negative property operations. All tax losses are
passed through to Limited Partners in proportion to their legal ownership share of the limited partner-
ship that owns a property.
Nonprot-sponsored projects more commonly t this prole of generating large losses because they are
more likely to take on large amounts of soft debt in order to reduce at least some units’ rents signicantly
below LIHTC levels. Sources of soft debt include HOME, CDBG, foundation funds, programs of the
Federal Home Loan Bank, and state and local housing programs. Without soft loans or substantial oper-
ating cash losses, depreciation alone is unlikely to drive investor capital accounts negative. Still, exit taxes
can be a problem for for-prots as well as nonprots.
INTENTIONS OF THE GENERAL PARTNER AFTER YEAR 15
GPs or their aliated companies may want to retain ownership of a LIHTC property for a number of reasons.
Mission-driven owners—most nonprot project sponsors, as well as some for-prot organizations—have an
organizational plan that is to develop and own aordable housing long term.
GPs may also be motivated by the nancial returns from the ongoing operations of the housing, through prop-
erty management fees and/or cash ow. Continued ownership of the property after Year 15 may be critical to
maintaining the scale or geographic concentration of a property management operation.
Some owners of LIHTC properties retain them at Year 15 with an eye toward the future: they hope that at a
later date they can sell them at a prot or renance them in a manner that will provide a nancial return. ese
owners may or may not also be interested in the nancial return from ongoing housing operations.
WHAT ARE THE OUTCOMES AT YEAR 15? CHANGES IN OWNERSHIP WHAT ARE THE OUTCOMES AT YEAR 15? CHANGES IN OWNERSHIP
33
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
3.2 SALES OF THE PROPERTY TO A NEW OWNERSHIP ENTITY
Although most GPs retain ownership of their LIHTC properties at Year 15, a minority sells out. is exchange
is almost always done by selling the property, although occasionally the GP interest is transferred to another
organization, with the original partnership continuing to exist.
REASONS GPS SELL AROUND YEAR 15
Based on the research done for this study, GPs’ motivations for selling are varied, sometimes driven by personal
reasons and sometimes by nancial considerations.
e most commonly reported GP motivations for selling are—
• Retirement. e GP has been a single individual who wants to retire or a small company whose several
owners want to retire from the real estate business.
• Leaving the business or change in business model. A GP may decide that it no longer wants to be engaged
in LIHTC properties, perhaps because its business model has shifted to focus on other kinds of housing
or real estate. In one instance, the study team was told about a small LIHTC property sold by a national
for-prot to a local nonprot because the original owner decided that it no longer wanted to deal with such
small properties. In another, the founder of the real estate rm that was the GP was about to retire, and his
son wanted to focus on commercial real estate.
• Outlier properties. An outlier is a property that is remote geographically from other owned real estate, per-
haps its sole property in a state, so a GP’s ongoing ownership is, therefore, inecient administratively and
nancially.
• Financial difficulties at the property. e property has been troubled nancially, and the GP no longer wants
to work on it or invest in it, or perhaps thinks another GP can operate it more eectively.
• Corporate problems. e GP or its sponsoring organization has run into corporate nancial diculties, and
so is disposing of all or most of its assets. is was the case for a 123-unit property in a southeastern state.
e previous sponsor was a large nonprot that went through bankruptcy.
• GP seeking financial return. e GP is able to realize a good nancial return by selling the property. One
example of this was a 150+ unit senior property in a strong California market. e GP decided that the re-
cent period of low interest rates on mortgages would be an ideal time to realize value, because the low rates
would translate into a higher sale price, ongoing LIHTC use restrictions notwithstanding.
• LPs seeking financial return. Under the terms of some partnership agreements, syndicators or investors may
be able to insist on a third-party sale if they believe the property has value, even with extended use restric-
tions, in excess of its outstanding debt and more than the price the GP is willing to pay.
WHAT ARE THE OUTCOMES AT YEAR 15? CHANGES IN OWNERSHIP
34
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
MOST NEW OWNERS ARE FOR-PROFIT ORGANIZATIONS LOOKING FOR CASH FLOW
AND OPERATIONAL SCALE
In recent years, a market has developed for the resale of properties reaching the end of the Year 15 tax credit com-
pliance period. ese properties are with for-prot owners, and the buyer also is a for-prot.
21
e three market-
dominant brokers specializing in sale of LIHTC properties reported to the research team that the dominant
business feature of the for-prot buyers for these properties is that they are very strong operators. ey are able to
minimize operating costs and maximize revenues, usually within the connes of extended use restrictions.
Brokers describe most buyers of Year 15 properties as “conventional real estate guys” who generally rely on a
conventional combination of debt plus private equity for nancing. e equity comes from either their own
resources or from a limited number of private business partners, without any formal syndication. Fannie Mae
products are frequently mentioned as a source of new mortgage nancing, although some buyers use conven-
tional bank debt nancing. Post-Year-15 LIHTC property buyers often use short-term debt. A popular Fannie
Mae program described by one broker oers terms as short as 7 years.
Brokers and syndicators described for-prot buyers of older LIHTC properties as falling into two broad catego-
ries. First, many of the organizations buying older LIHTC properties are large-scale regional or national owners
who achieve economic eciencies through economies of scale. Residential real estate is very much a business
of scale—per unit operating costs decline as property size increases, so much more money can be made operat-
ing a large property than a small one. erefore, it is no surprise that most of the properties that end up sold
to third parties appear to be among the largest in the LIHTC portfolio. Although more than 90 percent of
LIHTC developments placed in service before 1995 have 99 or fewer units, one broker reports 100 units as the
average size of Year 15 deals that they sell. Another broker publishes an annual report of their LIHTC disposi-
tions group; the average size of LIHTC property sold each year between 2006 and 2009 ranged between 131
and 146 units—denitely at the larger end of the LIHTC portfolio.
e second category of for-prot buyer of LIHTC Year 15 properties consists of small, hands-on operators who
own and operate modest-sized portfolios in a relatively tight geographic range. ese businesses are able to
achieve eciency through close personal control and intimate knowledge of local markets and resources. eir
sales are less likely to be handled by brokers and more likely to be arranged privately, either by the original
owner or by the syndicator.
Some buyers who are also property managers have reportedly been willing to buy LIHTC properties solely for
the chance to expand their operating portfolio, even when the properties have slim chance of generating eco-
nomic benets from cash ow or future resale value. e property price may be a multiple of management fees,
since that is where the primary value is assumed to reside. Such properties tend to be smaller deals, under 50
units, located in mid- to weak-range market areas, where LIHTC rents are at or greater than market rents.
Occasionally a nonprot organization will purchase an older LIHTC property. e research conducted for this
study indicates that these acquisitions have been infrequent but are not unknown. One example was a nonprot
that was ending its real estate activities and sold its only LIHTC property to another nonprot.
21. Only rarely do nonprot owners sell their properties. When they do sell, the new owner also is almost always a nonprot.
We learned of one case of a for-prot organization selling a property to a nonprot organization that had access to additional
subsidies for recapitalizing the property.
WHAT ARE THE OUTCOMES AT YEAR 15? CHANGES IN OWNERSHIP WHAT ARE THE OUTCOMES AT YEAR 15? CHANGES IN OWNERSHIP
35
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
Some buyers aim to renance and recapitalize a property with a new allocation of LIHTC credits or other
subsidy funds. Owners proceed with these transactions with the goal of earning developer fees and positioning
the property for at least 15 more years of physical and nancial health. e brokers interviewed for this study
reported that a minority of buyers of older LIHTC properties are seeking to use new tax credits. We discuss
what drives recapitalization, including use of LIHTC, in chapter 6.2 of this report.
WHAT ARE THE OUTCOMES AT YEAR 15? CHANGES IN OWNERSHIP
36
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
WHAT ARE THE OUTCOMES AT YEAR 15? CHANGES IN USE RESTRICTIONS
37
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
4. WHAT ARE THE OUTCOMES AT YEAR 15?
CHANGES IN USE RESTRICTIONS
4.1 USE RESTRICTIONS AFTER YEAR 15
During the rst 15 years of a LIHTC property’s compliance period, owners must report annually on compli-
ance with LIHTC leasing requirements to both the Internal Revenue Service and the state monitoring agency.
After 15 years, the obligation to report to the IRS on compliance issues ends, and investors are no longer at risk
for tax credit recapture. For properties with extended LIHTC restrictions through Year 30, the use agreements
between the original owners and the state allocating agencies remain in force. States vary in the extent and type
of reporting they continue to require. Although an exhaustive survey of state monitoring regarding extended
use restrictions was beyond the scope of this study, owner interviews revealed a range of state practices. Many
states require reporting after Year 15 that is identical to the rst 15 years. Some owners, however, claim that
they continue to comply with extended aordability restrictions but the state agency enforces them through the
honor system (or, perhaps, through the risk of litigation on behalf of tenants).
PROPERTIES SUBJECT TO USE RESTRICTIONS FROM ANOTHER FUNDING SOURCE
OR MONITORING AGENCY
Many LIHTC developments, including those placed in service between 1987 and 1994, are subject to other use
restrictions that last well beyond Year 15. Some sources of such restrictions are—
• Mortgage financing from housing finance agencies or other mission-oriented lenders. State HFAs around the
country are some of the most frequent mortgage lenders for LIHTC properties. HFA mortgages may have
terms of 30 or even 40 years. State HFAs typically require aordability restrictions that run the entire
length of the mortgage term. ese loans vary in other terms (for example, whether or not they permit
prepayment and whether or not prepayment would end aordability restrictions). Other mission-oriented
lenders include Community Development Finance Institutions or similar nonprot nancial institutions.
• Subordinate debt or grant financing from state or federal sources (including HOME or Community Development
Block Grants [CDBGs]) that bear requirements for long-term use restrictions. ese restrictions vary among
programs and funders. For example, although the federal HOME program sets minimum aordability
terms that are relatively short,
22
states or localities that allocate these funds not uncommonly require longer
aordability periods. Many states and localities have their own funds on which they set the length of af-
fordability restrictions. For example, one nonprot-sponsored development in a Northern California city
has city sources of nancing that come with 50-year use restrictions.
22. Federal minimum aordability requirements for HOME funds vary depending on the type of project. Renance of a
rehabilitation project previously assisted with HOME funds has a 15-year minimum aordability period; new construction must
remain aordable for 20 years. Existing housing that is rehabilitated or acquired must remain aordable for 5, 10, or 15 years,
depending on the average amount of HOME funds spent per unit.
WHAT ARE THE OUTCOMES AT YEAR 15? CHANGES IN USE RESTRICTIONS
38
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
• Land use agreements with states or municipalities that have contributed resources to the projects in exchange for
long-term affordability commitments. While it may be possible to extinguish use restrictions associated with
debt simply by repaying that debt, land use agreements typically run with the deed to the property and are
more dicult to remove. LIHTC projects with sites acquired from state or local government agencies not
uncommonly have aordability covenants that may extend for 40 or 50 years.
4.2 THE QUALIFIED CONTRACT PROCESS
Properties subject to an extended LIHTC use restriction may seek to have that restriction removed. e legisla-
tion that extended LIHTC use restrictions from 15 to 30 years for properties for which tax credits were al-
located in 1990 and later also established a Qualied Contract (QC) process under which owners may request
regulatory relief from use requirements after Year 15. e owner requests this relief from the state agency that
originally awarded the tax credits to a property.
Although the overall QC process is outlined in the federal law that governs the LIHTC program, Section 42
of the Internal Revenue Code, the IRS has never issued nal regulations detailing the process. As a result, each
state agency can dene its own regulations for implementing the QC process, so there are in practice “fty
avors of process.”
23
Furthermore, a number of states either require that developers seeking LIHTC waive their
right to use the QC process in the future or award competitive scoring points in return for waiving this right.
In these states, no QC applications are likely to be submitted.
e steps in the QC process are—
• e owner requests the state agency to nd a buyer for the property. e documentation that an owner must
submit when making this request varies substantially from state to state and, in some places, is extensive,
including for example, nancial statements from the entire life of the property and capital needs assessments.
• e state agency then has one year to nd a potential buyer who will maintain the property as aordable
housing. e state then presents to the owner a QC to buy the property at a sales price governed by the
formula specied in federal law.
• If the state presents a QC to the owner, then the owner is supposed to sell the property to the new owner.
But, if the state cannot nd a new owner that will oer a QC, then the owner is entitled to be relieved of
LIHTC aordability restrictions, and those restrictions then phase down over 3 years.
23. Kevin Day, Vice President of Centerline Capital Group, speaking at a November 9, 2011, IPED conference on Tax Credit
Property Dispositions.
WHAT ARE THE OUTCOMES AT YEAR 15? CHANGES IN USE RESTRICTIONS WHAT ARE THE OUTCOMES AT YEAR 15? CHANGES IN USE RESTRICTIONS
39
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
THE QUALIFIED CONTRACT SALES PRICE
e “qualied contract” is supposed to name a price that will acquire any non-low-income portion of the
property for “fair market value” and the low-income portion for the sum of—
• e “outstanding indebtedness secured by or with respect to the building,” plus
• e “adjusted investor equity in the building,” plus
• “Other capital contributions,” minus
• “Cash distributions from (or available for distribution from) the project.”
Without IRS regulation, the terms from federal law that dene the qualied contract price are subject to
interpretation. For example—
• Does “outstanding indebtedness” include loans made to the property by a general or limited partner
and not secured by a mortgage?
• “Adjusted investor equity” is supposed to be increased by the value of the Consumer Price Index (up
to 5 percent per year) for the time it has been invested. But does this include any funds invested by the
limited partners that were not anticipated at the time the original partnership agreement was executed?
• How will “cash distributions” be computed? Are they computed before or after paying for any
deferred developer fee or incentive management fees to either general or limited partners? Do they
include reserve funds?
Perhaps because it is so complex and uncertain, the syndicators and experts interviewed for this study report
that the QC process has rarely been used, even for properties that have not waived their right to use it. Chapter
6.3 describes some properties for which the QC process has been used.
4.3 PROPERTIES NO LONGER MONITORED AFTER YEAR 15
A total of 3,699 LIHTC properties were no longer monitored by HFAs as of 2009, according to information
supplied by HFAs to the HUD LIHTC database (exhibit 4.1). Among properties that had only 15-year LIHTC
restrictions because the allocation was made before 1990, about one-half of the properties are no longer monitored
by HFAs: 2,712 are monitored and 2,737 are not. e fact that so many still are monitored may reect HFA
nancing of the property’s debt. It may also reect longer use restrictions that were imposed by a few states and
encouraged by many, even for the earliest properties.
24
Some HFAs may continue to monitor properties that have
use restrictions from other programs under agreements with the local or state public agencies that administer these
funding sources, and they may or may not be included among the 2,712 properties still under monitoring.
24. As of 1990, at least 41 states required or gave preference to properties providing aordability for periods of longer than 30 years.
By 2001, this trend was true for at least 47 states.
WHAT ARE THE OUTCOMES AT YEAR 15? CHANGES IN USE RESTRICTIONS
40
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
Exhibit 4.1. LIHTC Properties Placed in Service, 1987 rough 1994, and No Longer Monitored as of 2009
No Extended Use: LIHTC Allocation,
1987 Through 1989
Extended Use: LIHTC Allocation,
1990 Through 1994
Monitored No Longer Monitored Monitored No Longer Monitored
Number of projects 2,712 2,737 4,879 962
Number of units 94,217 74,925 209,425 21,071
Average project size and distribution 35.3 29.0 43.2 22.3
0–10 units 42.8% 40.4% 20.7% 58.9%
11–20 units 10.8% 14.9% 14.2% 10.0%
21–50 units 28.8% 31.9% 42.9% 20.1%
51–99 units 8.4% 7.1% 12.0% 6.1%
100+ units 9.2% 5.8% 10.1% 4.9%
100% 100% 100% 100%
Construction type
New construction only 46.3% 54.5% 65.4% 49.1%
Rehabilitation 53.7% 45.5% 34.6% 50.9%
100% 100% 100% 100%
Nonprot sponsor 6.2% 4.8% 15.1% 12.6%
RHS Section 515 24.5% 31.6% 38.1% 13.9%
Tax exempt bond nancing 4.9% 1.7% 3.4% 2.1%
Location type
Central city 57.0% 44.5% 40.6% 58.4%
Suburb 23.4% 29.6% 25.6% 24.1%
Nonmetropolitan 19.6% 26.0% 33.9% 17.5%
100% 100% 100% 100%
Poverty rate of 10 percent or less 19.1% 26.6% 27% 21.8%
Percent of units with 2 or more bedrooms 59.5% 48.0% 53.7% 61.7%
LIHTC = Low-Income Housing Tax Credit. RHS = Rural Housing Service.
Notes: Projects used for analysis include only records with placed-in-service year data and tax credit allocation or award year. Projects
do not include all allocations through 1994, only those placed in service by 1994. Missing data information are in appendix E. Data on
whether a tax credit project was being monitored for LIHTC compliance are based on information provided by state allocating agencies.
Data on location type and poverty rate of 10 percent or less are based on LIHTC projects that were geocoded with census tracts from
the 2000 Census. e geocoding rate for projects placed in service from 1987 through 1994 was 88.9 percent. Central city locations
are based on central cities dened by 1999 metropolitan statistical areas (MSAs) dened by the Oce of Management and Budget.
Suburb locations are within an MSA but not in a central city. Nonmetropolitan locations are not in an MSA. Poverty rates are census
tract-level rates from the 2000 Census.
Source: HUD National LIHTC Database
WHAT ARE THE OUTCOMES AT YEAR 15? CHANGES IN USE RESTRICTIONS WHAT ARE THE OUTCOMES AT YEAR 15? CHANGES IN USE RESTRICTIONS
41
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
e 2,737 properties that were subject to 15-year LIHTC restrictions (because the tax credits were allocated in
1989 or earlier) and are no longer monitored are somewhat smaller, somewhat more likely to have been newly
constructed, somewhat less likely to be in central cities, and much less likely to have project-based rental assis-
tance than those that are still under monitoring. ey also are somewhat more likely to be in census tracts with
poverty rates less than 10 percent. ese characteristics probably reect dierences in state policy and other
sources of funding rather than decisions on the part of owners to leave the LIHTC program and no longer
provide housing at aordable rents. For example, the high percentage of properties still under monitoring that
have project-based rental assistance probably reects HFA debt nancing that would cause HFA monitoring to
continue for those properties.
A much smaller number of properties that had 30-year LIHTC restrictions are no longer subject to HFA moni-
toring: 962 properties or about 16 percent of all properties placed in service before 1994 that had tax credits
allocated in 1990 or later. ese properties may include some properties that have gone through the QC process
and are out of the 3-year phase down of LIHTC restrictions. ey may also include properties in states that do
not monitor compliance with use restrictions between Year 15 and Year 30. Properties with 30-year restrictions
that are no longer monitored are much more likely to be small (10 units or fewer). ey also are more likely to
be in central cities and less likely to have been newly constructed when rst placed in service. ese dierences
are hard to interpret. ey may suggest the type of properties likely to try—and succeed—in getting through
the QC process. Or they may simply reect dierences between states that monitor compliance after 15 years
and those that do not.
4.4 IMPLICATIONS FOR AFFORDABILITY OF CHANGES IN USE RESTRICTIONS
Properties that no longer have use restrictions from LIHTC or from other funding sources may or may not
continue to provide aordable housing. At least two types of properties will continue to provide housing that
is priced at or below LIHTC rents despite the absence of use restrictions: properties with owners committed to
long-term aordability and properties for which market rents are no higher than LIHTC rents.
PROPERTIES WITH OWNERS COMMITTED TO LONG-TERM AFFORDABILITY
Nonprot owners usually continue to operate properties as aordable housing beyond the term of any regula-
tory requirements because it is their mission to do so. Some for-prot owners interviewed for this study also
described their missions as providing high-quality aordable housing, long term. ese owners believe they can
“do well, while doing good” and may be dedicated to retaining their properties to serve needy households.
Nonprot syndicators interviewed for this study describe structuring the terms of the sale of LP interests to
put extended use restrictions in place, ensuring long-term aordability even when no other agreement restricts
a property’s use after Year 15. Corporate investors who choose to work with these nonprot syndicators do so
with the understanding that resale value is not expected to be among the investors’ own benets.
Two direct corporate investors, both nancial institutions, described long-term aordability as being among
their primary goals in negotiating exits from their LIHTC investments. One of these investors described a will-
ingness to sacrice back-end value in exchange for assurances of long-term aordability.
WHAT ARE THE OUTCOMES AT YEAR 15? CHANGES IN USE RESTRICTIONS
42
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
PROPERTIES FOR WHICH MAXIMUM TAX CREDIT RENTS ARE AT OR GREATER THAN MARKET RENTS
When a property is not subject to use restrictions and does not have a mission-driven owner, the owner may
still charge rents that are within the LIHTC standard of aordability, because the market will not support
higher rents.
It is among the 3,699 properties that were no longer monitored by HFAs as of 2009 that we might nd proper-
ties that are no longer aordable because their owners now charge rents that are higher than the LIHTC maxi-
mum. ose properties, however, would also have to be in locations where charging higher rents is possible.
WHAT ARE THE OUTCOMES AT YEAR 15? FINANCIAL DISTRESS AND CAPITAL NEEDSWHAT ARE THE OUTCOMES AT YEAR 15? CHANGES IN USE RESTRICTIONS
43
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
5. WHAT ARE THE OUTCOMES AT YEAR 15?
FINANCIAL DISTRESS AND CAPITAL NEEDS
5.1 PROPERTIES IN DISTRESS BY YEAR 15
While the strong majority of LIHTC projects operate successfully through at least the rst 15 years after they are
placed in service under the tax credit, some properties fall into nancial distress by the time they reach Year 15.
FINANCIAL PERFORMANCE OF LIHTC PROPERTIES
e most commonly used indicators of nancial distress are—
• Negative cash flow: e property’s revenues are lower than its cash obligations, including operating expenses
and debt service.
• Debt service coverage ratio of less than 1.0: is is the ratio of Net Operating Income (operating revenues
minus operating expenses) to debt service. If this ratio is greater than 1.0, then the property is producing
more than enough operating prot to fully pay its debt service. If the debt service coverage ratio is less than
1.0, then the property cannot pay its debt service obligations from operations alone and will need to make
up the shortfall in some other way to avoid default. Generally, underwriters prefer to see properties operat-
ing at a debt service coverage ratio of 1.15 or higher.
LIHTC PROPERTIES ARE VULNERABLE TO FINANCIAL DISTRESS BECAUSE
THEY ARE UNDERWRITTEN WITH TIGHT MARGINS
LIHTC properties are vulnerable to nancial distress because of their nancial structure. As distributors of
scarce nancial resources, the allocators of tax credits and other subsidies such as soft debt have been charged
with providing each project with the minimum amount of subsidy necessary to make the deal work. HFAs and
other subsidy allocators establish underwriting guidelines—for example, minimum and maximum debt service
coverage ratios and expected ranges for operating costs and replacement reserve contributions—that allow them
to determine that projects are supporting a reasonable amount of hard debt and are not over subsidized. ere-
fore, tax credit properties tend to operate with narrow margins.
At the same time, rents are limited to the lower of the LIHTC formula or the prevailing market rents. Projects
with Section 8 subsidies can apply for modest annual rent increases to reect the growth of operating costs.
LIHTC properties without Section 8, by contrast, have no such option if markets are at. Operating expenses
tend to increase from year to year, even if rents do not. Levels of debt that may seem reasonable at initial nanc-
ing can turn out to be excessive if rental revenues are at or falling while expenses continue to grow.
e nancial picture that emerges in the Ernst & Young Understanding the Dynamics reports conrms that
LIHTC properties operate at narrow performance margins. e latest report, Understanding the Dynamics V,
was published in 2010 and covers operating data that was provided by 51 syndicators and direct investors about
WHAT ARE THE OUTCOMES AT YEAR 15? FINANCIAL DISTRESS AND CAPITAL NEEDS
44
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
their properties’ performance from 2000 through 2006. Median cash ow was a very modest $247 per unit in
2006, and more than a one-third of properties experienced negative cash ow or debt coverage ratio of less than
1.0. At the same time, most negative cash ow was very close to breakeven, and most properties that underper-
formed in one year returned to positive cash ow and debt service coverage more than 1.0 in the next year.
e share of properties that had negative cash ow in any 2 consecutive years during the ve-year Ernst & Young
survey ranged from 9.5 percent (for the years 2002 through 2003) to 18.5 percent (for the years 2003 through
2004). e share of properties that had debt service coverage of less than 1.0 for a pair of consecutive years ranged
between 16 percent (for the years 2002 through 2003) and 27.2 percent (for the years 2003 through 2004). In
other words, between one in six and one in four properties suered through at least 2 consecutive years where
income was insucient to pay both operating expenses and debt service (Ernst & Young, 2010).
FEW LIHTC PROPERTIES EXPERIENCE DEFAULT OR FORECLOSURE
Given the tight margins with which many LIHTC properties operate, the percentage of foreclosures is sur-
prisingly small: Ernst & Young reports a cumulative foreclosure rate of only 0.85 percent from the program’s
inception through 2006. Syndicators interviewed in 2010 through 2011 for the current study reported similar
results, with all syndicators reporting foreclosure rates of less than 2 percent and most reporting foreclosure
rates of less than 1 percent.
Negative operating results are troubling for both limited and GPs. GPs may look to property cash ow as
an important source of nancial return for their eorts. LPs are less likely than GPs to look to cash ow as a
source of nancial return, but are deeply concerned with avoiding foreclosure, which is considered a premature
termination of the property’s aordability and results in recapture of tax credits, with interest, and forfeiture of
all future tax credit benets from the property. A property’s operating success can also have an impact on its re-
sale value. erefore, partnership agreements typically allow the LPs to intervene if a property falls into distress.
Properties with cash ow insucient to cover their obligations can avoid falling into default by drawing on
reserves or through additional capital contributions from the GP, the LP or both. Most LIHTC properties capi-
talize operating reserves out of the development budget. ose reserves are intended to cover operating or debt
service shortfalls. In addition, syndicators generally maintain reserves at the fund, or upper tier, level. ey may
choose to disperse these funds to support troubled properties in the portfolio and keep them out of foreclosure.
GPs and LPs may contribute capital beyond the original nancing to support oundering properties. Partner-
ship agreements generally obligate GPs to fund operating decits for a period of time by advancing operating
decit loans. Beyond these requirements, many GPs interviewed for this study described it as their obligation to
subsidize properties that run into operating diculties. Several interviewees mentioned as a point of pride that
they had always provided any support needed by struggling properties, even beyond the operating guarantees to
which they were contractually obligated, and that they have never relied on syndicators or investors to contrib-
ute additional capital. ey consider this part of their overall responsibilities as developers.
e Ernst & Young report shows that more than one-half (54 percent) of operating shortfalls are covered by the
properties’ operating reserves, and another 17 percent are covered by upper tier reserves. But reserves are nite
and may not be sucient to cover indenitely the operating decits of a chronically underperforming property.
General partners (GPs) make loans to properties to cover 9 percent of operating decits, and another 13 percent
WHAT ARE THE OUTCOMES AT YEAR 15? FINANCIAL DISTRESS AND CAPITAL NEEDS WHAT ARE THE OUTCOMES AT YEAR 15? FINANCIAL DISTRESS AND CAPITAL NEEDS
45
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
are covered by deferral of property management fees.
25
Syndicators and investors cover a smaller percentage of
operating decits with additional capital contributions (6 and 1 percent, respectively).
PATTERNS OF DISTRESS AT YEAR 15
Floundering properties typically run into trouble for one or more of the following reasons:
• Poor property or asset management practices.
• Problematic nancial structure.
• Physical condition of the property (damage, defects, or obsolescence).
• Soft rental market.
e following examples from the property-level data we collected for this study illustrate those reasons and the
patterns of response by the property’s owners and investors.
• Poor property or asset management practices: When occupancy plunged at a 120-unit property in a solid
Pacic Northwest market and the property fell into disrepair, the syndicator diagnosed poor management
as the cause. e LPs exercised their right to replace the original sponsor with a new GP they believed
could turn the property around.
• Problematic financial structure: A 60-unit property in a suburban Ohio neighborhood struggled from the
outset when projected commercial revenues from garage rentals never materialized. e property was thus
saddled with debt that was much greater than it could ever support in practice. e investor was called on
to make supplementary capital contributions from fairly early on in the property’s life to avoid foreclosure.
e investors ultimately replaced the GP. e new GP, in turn, recruited a trusted local property manager
to turn the property around.
• Physical condition of the property (damage, defects, or obsolescence): Construction defects were among a num-
ber of problems plaguing a renovated historic hotel in a small southwestern town. e requirements of the
historic renovation led to the problematic placement of air conditioning units on the building’s roof, in a
system that resulted in endlessly leaky pipes and extremely high air conditioning costs.
• Soft rental market: Market diculties further added to problems faced by this historic hotel-turned-senior
LIHTC property. With a declining local economy and the occupancy rate at a devastatingly low 59 per-
cent, the property was never able to come close to nancial stability, falling into default even before the
construction loan was repaid. e syndicator, however, felt it was imperative to its reputation and relation-
ships to keep the property out of foreclosure and protect the investors’ credits. e syndicator ended up
feeding the property more than $1 million during the course of the compliance period—far more than the
amount of the outstanding debt. e market continued to lose population, and demand for the units went
from weak to weaker. When the property nally nished the compliance period, the investors gave the rst
mortgagee the deed in lieu of foreclosure: with no rescue scenario in sight, the property was much more of
a liability to its owners than it had ever been a benet.
25. Presumably, it is far simpler to get these fees deferred for self-managed rather than third party-managed properties, so deferred
property management fees are eectively GP contributions.
WHAT ARE THE OUTCOMES AT YEAR 15? FINANCIAL DISTRESS AND CAPITAL NEEDS
46
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
e extent and nature of a property’s distress will inevitably shape its Year 15 outcomes:
• If a LP has replaced the GP of a failing property at some point during the initial compliance period, the
new GP may have been given a Year 15 purchase option in exchange for its services and investment in turn-
ing the property around. Such was the case for the Pacic Northwest property described previously, which
had suered as the result of poor performance from the original GP.
• Owners may seek a new allocation of LIHTC or other major nancial assistance to rescue a property with
major capital needs, or with a problematic nancial structure. is was the case with a property in a strong
southwestern market that needed to install an expensive rockfall mitigation system after a boulder crushed
one of the units; failure to address this physical threat would have rendered the development unsafe and
unsustainable had it not been addressed.
• Finally, if properties do fall into foreclosure, they may leave the aordable portfolio altogether. Such was
the case with a 330-unit Florida property, on which the rst mortgage lender (in that case the state housing
nance agency (HFA) foreclosed. e property was resold to a buyer who is converting it to market-rate
housing during a 3-year period.
5.2 CAPITAL NEEDS BY YEAR 15
e physical condition of LIHTC properties at Year 15 is widely varied, and so too are their renovation or
repair needs. Probably the most important determinant of physical condition at Year 15 is whether the property
was newly constructed or rehabilitated when it was placed in service 15 years previously, with key factors being
the quality of the original, new construction and, if rehabilitated, the scope of the renovation work that was
done then. Other factors that may be important are the target tenant population, market conditions, property
size, and the eciency and skill of the property manager.
CONDITION OF THE PROPERTY WHEN PLACED IN SERVICE UNDER LIHTC
If a property was new construction or a gut rehabilitation when initially placed in service under LIHTC, it is
less likely to need signicant upgrades at Year 15 than if it had only moderate renovations initially. Gut reha-
bilitation usually means that all HVAC systems and nishes in a property are replaced, exteriors are repaired
or replaced (for example, new siding and roong are installed), windows are replaced, and kitchens and bath-
rooms are remodeled and given completely new equipment. e property may also have had living spaces
recongured. In contrast, much less is done under moderate renovation: only some systems may be replaced,
while others are repaired; some kitchens and bathrooms may not be modernized; exterior improvements may be
limited. After 15 years of occupancy, a property with only moderate renovation is likely to be quite worn out.
For example, systems that were not replaced are at—or near—the end of their useful lives, and kitchen and or
bathroom equipment is worn out and out-of-date. Roofs or windows that were middle-aged a decade-and-one-
half ago likely need replacement.
Some new construction projects may have encountered unusual physical problems and need extensive renova-
tions at Year 15. One syndicator described a new construction property where the exterior building envelope
failed, leading to interior leaks and related problems and generating renovation needs of $70,000 per unit by
Year 15. Such a dramatic deciency, however, is the exception rather than the rule.
WHAT ARE THE OUTCOMES AT YEAR 15? FINANCIAL DISTRESS AND CAPITAL NEEDS WHAT ARE THE OUTCOMES AT YEAR 15? FINANCIAL DISTRESS AND CAPITAL NEEDS
47
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
Of the LIHTC properties placed in service between 1987 and 1994, 43 percent were rehabilitation projects
rather than new construction, according to the HUD LIHTC database. What these data do not tell us is the
level of renovation done. According to those interviewed for this study, however, in the early years of LIHTC a
high proportion of projects received only moderate renovations. At that time, federal regulations for the
LIHTC program required that a minimum of $3,000 per unit be spent on renovations, and many projects were
reportedly done with this minimum physical investment.
OTHER FACTORS AFFECTING PHYSICAL CONDITION BY YEAR 15
Properties that serve families with children usually endure greater wear and tear than properties targeted to the
elderly. Family housing may have three to six, or even seven, people living in a unit, compared with, typically,
only one adult in an apartment targeted to seniors. e owner of a property in a large city in the Northeast
described a new construction family property, which after 15 years, needs renovations of more than $100,000
per unit because of a combination of failing wood exterior siding, trim and related roof problems, wear and tear
from large families with many children, and the need to provide improved, more energy-ecient systems and
more environmentally friendly nishes, such as wood ooring instead of carpet—which is linked to asthma for
some children.
Market conditions may aect property conditions over time. If a property can be rented at or near the maxi-
mum LIHTC rents because it is in a strong housing market and has high occupancy rates, higher rents are
likely to generate more operating funds that can be used for maintenance and repairs than can be obtained
from housing in a weaker market, so the higher market property may enter Year 15 with fewer deferred repair
and maintenance needs. If a property is in a tough neighborhood where operating funds have to be spent on
security, the property may, again, have less rental income available for ongoing maintenance and repairs, and so
greater physical repair needs at Year 15.
A common industry view, shared by those interviewed for this study, is that the operating economies achiev-
able by larger properties make it easier to generate funds for maintenance and repairs. Ernst & Young’s analysis
of the nancial performance of LIHTC properties conrms this, reporting that cash ow per unit is twice as
high for large properties as it is for small properties (Ernst & Young, 2010, reporting on performance through
2006). Larger properties are likely to be in better condition at Year 15 than smaller properties, although this is
not universally true.
Some syndicators and a broker interviewed for this study pointed out that the skill and eciency of property
managers can have a large impact on the quality of LIHTC housing. Some managers run their property more
eectively than others, doing more with the same rental income stream, because they have gured out how to
get better economies in purchased services such as insurance or have gured out how to save by doing mainte-
nance with their own sta (for example, doing snow plowing in house rather than through third-party contrac-
tors). e more ecient managers may be able to devote money to maintenance that can prevent larger repair or
renovation needs—for example, xing small leaks before collateral damage occurs or more regularly updating
appliances, repainting, and replacing carpet or other ooring, so these remedies do not become a major call on
capital funds or replacement reserves.
WHAT ARE THE OUTCOMES AT YEAR 15? FINANCIAL DISTRESS AND CAPITAL NEEDS
48
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
EXTENT OF CAPITAL NEEDS FOR EARLY YEAR LIHTC PROPERTIES AT YEAR 15
Syndicators, investors and other industry experts interviewed for this report have a range of views about the
extent of renovation and repair needs across LIHTC properties at Year 15. One of the investors believes nearly
all LIHTC deals need signicant renovations by Year 15. In contrast, one broker thinks that repair needs are
in the eye of the beholder, noting that private real estate operators looking at nearly any Year 15 property that
was originally new construction would say that it needs little if any upgrading. LIHTC investors, in contrast,
are accustomed to tapping public resources such as tax credits to provide improvements, and so they perceive a
need for renovation.
LIHTC properties are required by state housing agencies, mortgage lenders, and investors/syndicators to fund
annually, out of operating income, replacement reserves to pay for capital repairs and renovations that exceed
routine maintenance. e annual reserve contribution funded by LIHTC properties typically runs between
$250 and $400 per unit per year, and occasionally is higher. e general consensus of those interviewed for this
report is that these reserves are insucient after 15 years to cover current needs for renovation and upgrading.
One large investor believes that most LIHTC properties—with a few large-scale properties perhaps excep-
tions—run out of reserves by Years 5 to 8 and, after that, spend reserves nearly as soon as they are funded.
Given the unpredictability of the rates at which building systems wear out or become obsolete, it is dicult
to provide an estimate of the right level of reserves to cover capital needs during a period of 15 years or longer.
A recent study conducted for HUD by Abt Associates of the capital needs of public housing developments
estimates that the average annual accrual of needs for this multifamily housing is about $3,000 per unit per
year (Finkel et al., 2010). For many of the LIHTC properties we observed, this level would require that 6
months’ rent each year be put into reserves, severely reducing or even eliminating rent available to retire debt.
e properties would need more tax credit equity or more soft debt, either to create a substantial replacement
reserve up-front or to permit a reserve to absorb such a large portion of the property’s rental income. HFAs have
been—and probably would be—reluctant to expend scarce tax credit and other resources to create reserves on
this level, since that would reduce the overall number of aordable housing units they can support.
If reserves are insucient to pay for renovations and major repairs at or around Year 15, LIHTC owners will
need to gure out how to recapitalize their properties. Even if the property was originally newly constructed,
more extensive needs will arise within another 5 to 10 years, both because physical systems such as roofs and
heating systems will reach the end of their useful lives and because kitchens, bathrooms and nishes will need
to be updated to remain competitive in the market, even when properties are continuing to be aordable. If a
property is continuing to operate at LIHTC rents, it may have to compete for tenants with new LIHTC proper-
ties, and the property in better physical condition will likely win out. Even if they do not need to be modern-
ized, nishes and equipment in kitchens and bathrooms are likely to wear out after 15, 20, or 25 years of use,
depending on how high the quality was initially and how hard they have been used.
Periodic recapitalization is the way in which most privately owned housing (including single family homeown-
ership housing) meets major repair and replacement needs over time. It is probably unavoidable for LIHTC
developments to follow this pattern as well.
WHAT ARE THE OUTCOMES AT YEAR 15? FINANCIAL DISTRESS AND CAPITAL NEEDS PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
49
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
6. PATTERNS FOR LIHTC PROPERTIES
AFTER YEAR 15
Study participants from all of the syndicators and direct investors interviewed, as well as a range of other indus-
try experts, reported remarkably consistent impressions of the real estate outcomes for Year 15 properties:
• e vast majority of LIHTC properties continue to function in much the same way they always have, providing
affordable housing of the same quality at the same rent levels to essentially the same population, without major
recapitalization. ese properties may have some rehabilitation done at Year 15, often in connection with a
change of ownership or renancing, but the amount of work done is not extensive enough to be character-
ized as recapitalization.
• A moderate number of properties are recapitalized as affordable housing with a major new source of public
subsidy. is new subsidy is most typically new tax credits, either 4 or 9 percent. ese properties usually
undergo a substantial program of capital improvements.
• e smallest group of properties is repositioned as market-rate housing and ceases to operate as affordable.
ese outcomes may be linked to the property’s LIHTC use restrictions, to whether the property is sold to a
new ownership entity, and to whether the property became distressed before Year 15. However, each of the
three outcome patterns occurs for properties with and without extended use restrictions, for properties with
both original and new GPs, and for properties that were and were not distressed before they reached Year 15.
26
6.1 PROPERTIES CONTINUING TO OPERATE AS AFFORDABLE HOUSING
Most early year properties continue to operate as aordable housing, in much the same manner as they had pre-
viously, after the expiration of the initial 15-year aordability period. is outcome is typical both for proper-
ties that continue to be owned by the General Partner (GP) or its aliated organization and for properties that
have changed ownership. Continued aordability may have one of several reasons:
• First, there may be use restrictions from other regulatory sources such as land use restriction agreements
or soft funding that survive longer than 15 years. e sponsor may have initially waived its right to seek a
Qualied Contract (QC).
• Second, the initial sponsor (or, less commonly, the investor) may have a long-term commitment to contin-
ued aordability. Nonprot sponsors usually have such organizational commitments to providing aord-
able housing, and a few for-prot sponsors do as well.
• ird, the property may have other subsidies—for example, Section 8 housing assistance payment con-
tracts—attached to the units, creating a secure source of occupancy and rental income that the owner does
not want to give up.
26. A very small number of properties leave the rental housing stock altogether following a downward spiral of physical and nancial
distress. e site may or may not be redeveloped as market-rate housing. We do not consider this trend as a separate pattern, but
instead group those examples with properties that are repositioned as market-rate housing with unaordable rents.
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
50
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
• Finally, for a very large number of LIHTC properties, LIHTC rents are indistinguishable from market
rents. is varies both by region of the country and by the narrower housing market within which the
LIHTC property operates. If these properties are no longer covered by LIHTC or other use restrictions,
they are simply absorbed into the general rental market with no particular competitive advantage by virtue
of greater aordability. Owners of properties where LIHTC rents are indistinguishable from market rents,
whether they are original sponsors or new purchasers, often describe these properties’ post-Year 15 LIHTC
status as irrelevant.
PROPERTIES REMAINING AFFORDABLE WITH ORIGINAL OWNERS
All the information gathered for this study shows that most LIHTC properties that reached Year 15 through
2009 are still owned by the developer who placed them in service between 1987 and 1994, and that most of
those original GPs are operating the properties as aordable housing, either with LIHTC restrictions in place
or with rents that nonetheless are at or below LIHTC maximum levels. ey may or may not still be reporting
to the HFA. ese GPs may have renanced the properties to take advantage of lower interest rates and to sup-
port modest levels of renovation, but they have not recapitalized them with new infusions of equity from a new
syndication with additional tax credits. Many of the owners interviewed for this study told us that it simply
was not worth the eort to try to leave the tax credit program through the QC process, because they could not
increase rents outside the program or could increase them only marginally.
e pattern of properties remaining aordable with their original owners and without major recapitalization
is common in strong, weak, and moderate markets alike. A 210-unit property in a suburb of a Pacic North-
west city provides a strong housing market example. e original GP is a family run developer/operator with a
portfolio of 6,500 units in ve states. A solid property in a strong housing market, this development had value
beyond its outstanding debt at Year 15. e GP renanced in order to buy out the LPs, who made a prot on
the transaction. e renanced debt was sucient to replace the roof at the time of repurchase. Owners report
that the property continues to operate successfully, generating sucient cash to cover capital needs as they arise,
and that the biggest operating challenge is nding tenants in the proper income window—that is, with incomes
low enough to qualify but high enough to pay the rents.
An example in a very dierent market is a 100-unit property in a small Michigan city. Although the property
had high occupancy initially, it suered greatly from the decline in the dominant local manufacturing industry
and from competition from new LIHTC properties that continued to come on-line despite the city’s continuing
economic distress. e LPs ended up selling their interest to the GP for no consideration beyond the outstand-
ing debt. e state HFA contributed $15,000 per unit in soft debt to meet Year 15 capital repair needs, not
enough for us to consider this a major recapitalization and without a new allocation of LIHTC. e property
remains aordable, and the original GP continues to operate the property at breakeven, despite the substantial
market challenges.
Finally, an average market example is a 48-unit property in a rural community in the Midwest. e original
developer also owns and operates the management company that has operated the property since inception and
took full ownership of the property at about Year 15. While this property’s owners might be able to use the QC
process to end the LIHTC use restrictions, the local market limits rents to roughly LIHTC maximum levels.
e property continues to operate solidly, and owners believe that they will be able to cover capital needs from
reserves and cash ow for about 10 more years before they will need to renance to cover larger repairs.
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15 PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
Owners of these aordable post-Year 15 properties seek to earn prots from operating cash ow, from property
management fees, or both. As noted in chapter 5.1, the Ernst & Young studies show that most LIHTC proper-
ties provide positive cash ow most of the time. Whether nonprot or for-prot, these owners consider them-
selves to be in the aordable housing business, and many own portfolios of properties that provide them with
the scale important to ecient real estate operations.
Even if rents of nearby rental developments are a bit higher, owners may choose to keep LIHTC rents lower
to achieve high occupancy. Like any other business operator, owners and managers of rental residential prop-
erty need to nd the ideal balance between price and volume to maximize revenues. High occupancy at lower
rents may generate greater revenues than lower occupancy with higher rents. Property managers earn fees as a
percentage of revenues, so higher revenues will lead to increased property management fees. Property managers’
exibility in setting rents in LIHTC properties, however, may depend on the properties’ age. A study by Burge
(2011) found that maximum tax credit rents are initially less than implied market rents because of the proper-
ties’ newness when placed in service, which increases the appeal of the units to potential renters. During the
15-year compliance period, however, the properties aged and deteriorated in quality, and their market advan-
tage eroded. At this point, property managers may be forced to trade o higher occupancy for higher rents or
vice versa.
Sometimes the original GP of a LIHTC property will have renanced before Year 15 to take advantage of
better nancing terms such as lower mortgage interest rates. is requires the approval and cooperation of all
parties to a deal: GPs and Limited Partners (LPs) plus funders. An example of an early renancing is a large
new construction property serving families with two- and three-bedroom units, in the Mid-Atlantic region.
e GP decided to renance when the property was only 10 years old. A lower interest rate on a new mortgage
from the same housing nance agency (HFA) that had held the original mortgage (6.9 percent compared with
nearly 10 percent) plus a new 40-year mortgage term enabled the property to carry a larger mortgage that gen-
erated signicant capital payments to both the GPs and LPs. Funds from the renancing were also added to the
property’s replacement reserves. Since the LP investor had to approve the renancing, it used the opportunity to
negotiate the price of a “put” to sell its interest when Year 15 arrived. At Year 15, the GP bought the LP interest
for the agreed-upon price, with the intention of continuing to operate the property as aordable housing under
LIHTC rules.
At other times, the GP renances at the same time as buying out the investors in the original syndication,
because cash beyond the current mortgage is needed to meet the syndicator/LPs’ price. Whether the property
can take on additional debt at around Year 15 depends on such factors as the sales price of the LP interests, the
ability of the property’s rents to cover additional debt, how much of the original debt has been amortized, and
whether current interest rates are favorable.
PROPERTIES REMAINING AFFORDABLE WITH NEW OWNERS
Among the minority of LIHTC 15-Year properties sold to new ownership entities, most were sold to buyers
willing to accept the LIHTC aordability restrictions but, at the same time, not buying for the purpose of
recapitalizing the property with additional tax credits. ese properties are behaving much like conventional
real estate: for-prot owners buy and hold them for a relatively short period, with a modest program of capital
improvements. e buyers themselves describe the projects’ LIHTC history as more or less irrelevant to their
business decisions and operations, regardless of whether they have to continue complying with LIHTC rules.
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
52
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
Renancing is nearly inevitable when a new owner purchases a property, since most rst mortgages cannot be
assigned to new owners, and since new owners will need to raise funds to pay for the purchase price and any
needed renovations. e relatively short terms of the debt typically used by for-prot organizations to nance
such purchases of LIHTC properties imply that these new owners will renance or sell the properties in a much
shorter timeframe than is customary for newly syndicated LIHTC properties, which generally are locked into
nancing for 15 years or more.
Brokers describe typical buyers as planning to own and operate properties for 3 to 7 years, a timeframe typical
for conventional multifamily property owners. ese buyers will generally perform a modest scope of renova-
tion as part of the purchase transaction. One broker mentioned $3,000 to $5,000 per unit as a typical level of
expenditure, used to update the property to make it more attractive—for example, improving landscaping or
security systems, updating kitchen equipment, or replacing ooring.
Such was the buyer of a 44-unit property in a working class neighborhood in a Southern California city. is
purchaser holds a residential portfolio of slightly more than 600 units, all in the same region. While he bought
the property subject to an additional 40 years of LIHTC use restrictions required by the California state
agency, he describes his interest in the property very much in conventional terms. He nanced the purchase
with conventional debt of 60 to 65 percent of the purchase price, with his own private equity making up the
balance. On purchasing the property, he invested roughly $2,275 per unit in improvements, largely cosmetic:
landscaping, signage, and improvements to the courtyard and hallways, as well as the installation of a security
system. He spoke of the improvements as growing out of a “certain pride of ownership in our buildings and a
commitment to how we want to keep our buildings.” In this case, the owner plans to hold the property and
operate it for cash ow indenitely. With no soft funding in the project and no investors remaining in the deal,
any cash ow the owner can achieve will be his to keep and to use to support periodic renancing when needed
for renovations. Although this is the owner’s rst LIHTC property, he nds the regulatory framework (includ-
ing qualifying tenants based on their income) familiar because of his work with Section 8 and other subsidy
programs. Even though he considers LIHTC rents to be somewhat below market, he sees this as a business
advantage, since it enhances occupancy and reduces unit turnover.
Another buyer of a LIHTC property in California with long-term use restrictions, in this case a 150+ unit
senior property that is in a market where unrestricted rents would be higher, is generating substantial cash ow
from the restricted LIHTC rents—which, given the property’s location, are quite substantial. e property
originally carried soft debt that could have eaten into cash ow, but that debt was retired as part of the sale.
Another example, from a weaker market, is a 270-unit property in a small city in central Florida. e rm that
purchased the property is based in the Southwest and develops and operates a large and diverse portfolio of
properties of all types, including shopping malls, hotels, and single-family subdivisions. e rm recognized a
value opportunity in this development, purchased for slightly more than $30,000 per unit. Although the prop-
erty was in good physical condition, the owner invested $3,000 in improvements per unit. e owner’s inten-
tion is to operate the property for cash ow and management fees. Buying at a low price in a weak market, the
new owner is well-positioned to benet from appreciation in value if and when the market improves.
A fourth example is a 156-unit property in a Mountain state, purchased in part because investors in the new
partnership wanted Community Reinvestment Act credit. e property was bought in the 12th year of the 15-
year compliance period, and the buyer could have considered applying for a QC process (QCP). e buyer told
us: “We would not consider a QCP. We don’t have experience with it, dierent states have dierent processes,
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15 PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
53
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
and we think the market is what it is.” e aordability restrictions had no negative impact on the decision to
purchase the property, and the buyer intends to operate the property as aordable for the 8- to 10-year period
during which the organization plans to hold the property. In this market, maximum LIHTC rents are higher
than unrestricted rents, so although the new owner made minor renovations and raised rents slightly, the units
remain aordable.
Even properties that were distressed around Year 15 can follow the pattern of continuing to operate as aord-
able housing without recapitalization. e new GP of a distressed Pacic Northwest property invested close to
$6,000 per unit and turned the property around. In return, he was permitted to buy the investors out at a very
reasonable price and to recapture his investment capital as part of the nancing. e property is now thriving,
producing several hundred thousand dollars per year in cash ow.
PAYING FOR RENOVATIONS SHORT OF RECAPITALIZATION WITH NEW TAX CREDITS
e interviews conducted for this study indicate that many LIHTC properties incur rehabilitation costs at the
modest level of $1,000 to $5,000 per unit around Year 15 if they are transitioning to more conventional real
estate operations—that is, with owners motivated by cash ow and resale value rather than by LIHTC-driven
developer fee, and where the expected ownership period is 3 to 7 years rather than 15 years. Generally, that
work is paid for by simple renancing of the property’s debt. Properties seeking renancing often have been
able to take advantage of lower interest rates.
A number of owners described properties that needed somewhat higher levels of renovation—in the range of
$7,500 to $15,000 per unit, but still not enough to justify seeking new tax credits. One such property is a 47 unit,
new construction development for families, largely two- and three-bedroom units in a city in the South. When
the property reached Year 15, its rehabilitation needs included some new siding, new air conditioning systems,
and some refurbishing of the apartments, at a cost of about $10,000 to $11,000 per unit. e GP acquired the LP
interests for $400,000 ($8,500 per unit). As the sole owner of the property and a nonprot, the GP was able to
obtain an exemption from local real estate taxes, freeing up rents for both ongoing operations and new nancing.
e owner used both project reserves that the property had been funding at the unusually high level of $500 per
unit per year and a new soft loan from a national housing intermediary to cover rehabilitation costs.
A distressed property sometimes can pay for needed renovations without major recapitalization with new tax
credits but instead using conventional types of nancing. For example, the new manager of an Ohio project
with a problematic nancial structure ultimately bought the property for the value of the outstanding debt and
was eventually able to take advantage of principal amortization and lower interest rates and renance the debt
down to levels the property could manage, while taking care of needed renovations.
Rents that are the lower of the LIHTC maximum or what the market will bear are extraordinarily dierent in
dierent housing markets, both because the LIHTC formula is tied to the local Area Median Income (AMI)
and because market rents vary. For example, rents reported by owners interviewed for this study include $410
in rural Missouri, $500 in suburban Ohio, $750 in St. Paul, Minnesota, $900 in a Montana resort community,
$1,000 in a distant suburb of New York City, and $1,155 in a Virginia suburb of Washington, DC. Occupancy
rates that can be achieved vary similarly. A property in Boston, Massachusetts, might operate with a 1- to
2-percent vacancy rate, while a high-performing property manager in rural Ohio might cap out at an 85-per-
cent occupancy rate.
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
54
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
Properties able to achieve high rents and high occupancy levels can generate signicant cash ow. Such proper-
ties have real market value, even with rents restricted below market levels. eir owners have opportunities to
renance in order to pay for capital improvements or to simply cash out some of their equity. A rental complex
with $950 average rents and a 5-percent vacancy rate is in a far better position to install dishwashers to keep up
with the competition or deal with a surprise roof leak than a development with $500 average rents and a 15-per-
cent vacancy rate. So, although it is apparently true that most post-Year 15 LIHTC developments from the pro-
gram’s early years have slipped into the mainstream of properties with rents around the middle of the market,
over time these developments will continue to fare quite dierently depending on where they are located.
6.2 PROPERTIES RECAPITALIZED AS AFFORDABLE HOUSING
WITH NEW TAX CREDITS
Some LIHTC properties are recapitalized as aordable housing at Year 15 or shortly thereafter with a new al-
location of tax credits. New equity is brought into the property through a new partnership, which may include
the original GP or may be a completely new ownership entity. In addition to new tax credits made available
to the new limited partnership, the property typically is renanced and may also have new soft debt. e new
equity and debt are used to pay for renovation costs that often are substantial.
WHICH PROPERTIES ARE MOST LIKELY TO SEEK ADDITIONAL TAX CREDITS?
When deciding whether to seek a new allocation of tax credits to recapitalize a property, owners weigh a variety
of factors, both factors internal to the property and factors in the external economic and policy environment.
FACTORS INTERNAL TO THE PROPERTY include the extent of the property’s capital needs, the need for mod-
ernization to compete with new aordable housing, whether an infusion of additional equity appears to be the
only way to bail out a distressed property, whether it appears that the deal will generate substantial prots for
the property’s owners, and whether the owners might do even better by waiting until current use restrictions
have ended rather than extending them further.
• Dealing with major capital needs. When properties have major capital needs, resyndication with new tax
credits can be an eective way to generate equity capital to pay for these expenses. We learned about two
examples of properties with large, unanticipated capital needs by Year 15. One property in a strong south-
western market sought a new LIHTC allocation after a mountainside abutting the development became
unstable and a boulder crashed into one of the units, revealing the need for an expensive rockfall mitigation
system. Another property, in a city in the Northeast, suered from defects in the original siding that led to
water inltration and a host of other problems.
• Competing with newer housing. Even where boulders have not crashed into the walls, many owners
describe properties as tired and in need of updating after 15 years of operations. In some markets, there
has been continuing development of new LIHTC properties, and owners say they need to complete im-
provements to retain existing residents and attract new residents when units become vacant. One owner of
several elderly housing developments described needing to invest signicantly both in modernizing apart-
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15 PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
ments and in better community space such as exercise rooms to compete with new LIHTC senior housing.
Improvements to apartments include updated bathrooms, kitchens, and nishes, and are more important
for marketing than community space, according to this owner. Another owner, in this case the purchaser of
a family property, similarly reported that the new ooring, countertops, and appliances supported by new
tax credit equity were important for making the property competitive with other LIHTC housing. If own-
ers believe such renovation needs are extensive, they are more likely to seek a new allocation of tax credits
than to try to nance them through cash ow or another type of renancing.
• Rescuing a property from financial stress. Properties can use LIHTC recapitalization as a way to recover
from nancial distress. is was the case for a family property in an inner suburban low-income location
in the Mid-Atlantic. e property had been distressed once before and was sold from the HUD property
disposition inventory in the early 1990s with Section 8 rental subsidies and an allocation of LIHTC from the
state agency. By Year 15, the property had become distressed once again and was again resyndicated with tax
credits and soft debt.
• Earning profits for the owners. A number of development rms around the country have embraced resyn-
dication and rehabilitation of older aordable properties as a business model. ey can earn developer fees and
then proceed to operate the property for cash ow. For some properties, the economics of resyndication may also
support a higher transfer price from the old to the new owners, enabling them to realized greater prots on sale.
us, resyndication of older LIHTC properties can be a way to achieve strong nancial returns for both old and
new owners. is was the case for a northern Florida property sold by a for-prot interested in liquidating its
aordable housing portfolio. New tax credit equity was used by the purchaser to purchase the property and for
renovations that in this case were fairly modest, $16,000 per unit. Most of the development budget went to the
acquisition cost.
• Accepting ongoing reporting requirements and use restrictions. If a project gets a new allocation of
tax credits, it begins again the cycle of use restrictions and required reporting on LIHTC compliance.
Depending on the owner’s expectations for the housing market specic to the property’s location and on
other property characteristics, the owner may judge the net current benets of resyndication with more tax
credits more valuable than the possibility of drawing out future appreciation during the next 15 years.
FACTORS EXTERNAL TO THE PROPERTY include state LIHTC policies and priorities and the current market
for equity investments in LIHTCs.
• Responding to state LIHTC policies and priorities. States have diverse policies and priorities that help
determine whether or not they will award LIHTCs to a property. Some states are supportive of giving sec-
ond allocations of competitive, limited 9-percent LIHTCs to the same properties, while others try to pre-
serve this resource for creating additional units of aordable housing. In at least one state, New Hampshire,
applications for resyndication are described as not competitive, and therefore unlikely to be funded with
9-percent credits. An alternative to competing for 9-percent credits is to seek a noncompetitive allocation of
4-percent LIHTCs. A state may be more willing to provide 4-percent credits because they depend only on
the availability of tax-exempt private activity bonds within the state’s overall ceiling.
• Assessing the current market for LIHTCs with equity investors. When evaluating whether to resyn-
dicate with tax credits, an owner needs to assess the market for tax credits, just as is done when initially
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
56
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
determining a potential project’s nancial feasibility. Several syndicators and brokers reported that, during
the economic downturn beginning in late 2007, the market for resyndications plummeted, just as it did for
initial development of LIHTCs, so that fewer properties were resyndicated for several years thereafter.
STATE POLICIES AND PRIORITIES FOR NEW ALLOCATIONS OF 9-PERCENT TAX CREDITS
We heard a variety of opinions from syndicators, brokers, and other experts on how easy or dicult it is to
get a second allocation of 9-percent credits. e 9-percent credits are awarded through a process that, in most
states, is extremely competitive. Many industry participants and observers report that most states favor new
production more than preservation in their Qualied Allocation Plans (QAPs). Even where the QAPs include a
set-aside for preservation, allocators may be reluctant to award new 9-percent credits to projects that received a
rst allocation 15 years earlier. Other industry experts provided a dierent view and said that HFAs with which
they are familiar prioritize preservation of older LIHTC developments.
Some of the properties covered in interviews for this study that were resyndicated with 9-percent credits
received those credits in response to particularly dire and expensive capital needs crises that would have threat-
ened the developments’ continued operation as housing. For example, the two properties that had large, unan-
ticipated capital needs (rockfall mitigation and siding defects) received 9-percent LIHTC allocations in states
that did not include a preservation priority in their QAPs.
Data collected and analyzed by the National Housing Trust (NHT) show that most states have some type of
priority in their QAPs for preservation and rehabilitation of existing housing. How an older LIHTC develop-
ment would fare competitively within those priorities is dicult to determine in many cases. However, as of
2010 through 2011, California, Colorado, Delaware, Georgia, Hawaii, Illinois, Indiana, Michigan, Minnesota,
Missouri, New York City, North Dakota, Oklahoma, Oregon, and Texas stated explicitly in their QAPs that
existing tax credit developments qualied for points or a set-aside for preservation. Appendix D is a table pro-
vided by NHT showing more detail.
Even when an older LIHTC property qualies for a set-aside or additional points for preservation of existing
housing, it still must compete with other properties that get the points or qualify for the set-aside as well. Prop-
erties other than older LIHTC properties may score better on other aspects of the state’s system for competi-
tive allocations of 9-percent credits. Furthermore, the older LIHTC property may have to pass some threshold
criteria such as the minimum level of rehabilitation needed to qualify for a 9-percent credit.
27
However, we heard of cases in which new owners bought LIHTC properties with the knowledge that they
would be likely to get new 9-percent LIHTC allocations from the HFA because the state has a priority for pres-
ervation and also is the mortgage lender for the property.
Indeed, some experts told us that an industry of LIHTC preservation appears to be developing. One developer
of aordable housing noted that his organization was only just getting started looking at acquiring properties
that were reaching Year 15. Generally, their property acquisitions were for properties still in the initial 10-year
period. In anticipation of more properties reaching Year 15, in 2011 the rm began to hire sta to deal with
27. e tax code establishes a minimum amount of rehabilitation work needed to be done—the greater of $6,000 per unit or 10
percent of acquisition costs—to be able to qualify for LIHTCs, whether the 4-percent credit or the 9-percent credit. A state’s
QAP may establish other thresholds, for example, a minimum amount of rehabilitation work, for preservation projects to qualify
for 9-percent credits.
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
acquisition opportunities that are coming up in the next 1 to 2 years. We spoke with another for-prot devel-
oper who bought the GP interest in a LIHTC property a few years before Year 15 from another for-prot who
wanted to get out of the aordable housing business. e new owner wants to operate the property for cash
ow and management fees, but also intends to form a new partnership and resyndicate the property with new
tax credits as soon as that becomes possible.
WHEN DOES BOND FINANCING WITH 4-PERCENT CREDITS WORK?
Most developers would choose a 9-percent credit over a 4-percent LIHTC allocation if they were equally avail-
able. e 9-percent formula generates more than twice the equity for a given dollar amount of rehabilitation.
Moreover, the use of 4-percent credits entails the issuance of tax-exempt bond debt, which brings a whole range
of transactional costs and complications. But if 9-percent credits are not available, 4-percent credits may be a
good alternative for some properties.
Since the 4-percent tax credits can be used only with tax-exempt mortgage nancing, tapping them means as-
sessing whether this kind of debt is appropriate for a project.
FINANCING WITH TAX-EXEMPT BONDS AND 4 PERCENT CREDITS
To qualify for 4 percent credits, properties must be nanced with tax-exempt private activity mortgage
bonds in an amount equal to 50 percent or more of their basis. is can be achieved in two ways:
• e bonds can be used for permanent nancing: is strategy can only work for properties with
very strong rents and relatively low operating expenses, because the properties must be able to sup-
port debt equal to at least one-half of their value (something many rent-restricted properties cannot
achieve). Properties that have Section 8 rental assistance are likely to have high rents, and so may be
able to aord tax-exempt bond nancing.
• e bonds can be used for construction nancing, or for a mix of construction and permanent nanc-
ing: If some or all of the bonds are going to stay in the project only for construction nancing, then
there needs to be a permanent source for repayment of those bonds. Tax credit equity is one such
source; but the formula for calculating 4 percent credits makes it impossible to generate sucient equity
to cover one-half of the development budget. erefore, 4 percent projects that cannot support large
amounts of mortgage debt can use private activity bonds for construction nancing, but they must
eventually bring a large amount of alternative funding (such as soft debt) into the projects to pay o the
portion of the bonds that cannot be supported by permanent property operations. ese projects will
also need to nd a bond-issuing agency willing to use their private activity bond allocation to provide
construction nancing in this way (not all state HFAs have adopted this practice).
Bond deals oer the advantage of keeping owners out of the highly competitive 9-percent credit application are-
na. Even if the property succeeded in obtaining a 9-percent allocation, the greater predictability of a 4-percent
credit would reduce the developer’s risk. But bond deals are complex, and transaction costs are high. So they are
really only appropriate for larger projects that have sucient scale to amortize the transaction costs over a large
number of units. Furthermore, the economics of bond deals are such that tax losses comprise a signicantly
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
58
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
higher proportion of benets for investors than in 9-percent deals (9-percent deals will see a relatively higher
proportion of benets owing from the tax credits themselves). Four-percent projects are perceived as somewhat
higher risk than 9-percent deals, because they typically involve higher amounts of mortgage debt relative to eq-
uity. In addition, 4-percent deals generally oer smaller amounts of annual tax credits than 9-percent projects,
making them less ecient as investment vehicles. Because of their smaller size and higher risk prole, it may be
dicult for some 4-percent tax credit projects to attract investors, especially in weaker markets.
Perhaps most important, a property must be able to generate enough rental income to take on the amount of
debt required for bond nancing (see text box). A common industry perspective is that bond nancing will
work only in markets where both LIHTC rents and market competitive rents are quite high—or where the
property has above-market rents supported by Section 8 subsidies.
Still, in cases where the economics of the market and the property support 4-percent tax credit renancings,
some industry observers believe there is a strong motivation for owners (new or old) to resyndicate with 4-per-
cent credits, regardless of whether the property’s current capital needs are particularly pressing. One owner in-
terviewed for this study built a national portfolio of more than 10,000 units largely by purchasing properties in
need of moderate levels of rehabilitation and syndicating—in some cases, resyndicating—these properties with
4-percent credits. ese transactions can earn substantial fees for developers and oer the prospect of ongoing
cash ow and management fee income for competent operators in strong housing markets.
HOW MUCH REHABILITATION IS DONE WHEN PROPERTIES ARE RESYNDICATED WITH
NEW TAX CREDITS?
To qualify for a new LIHTC allocation, owners must complete rehabilitation costing a minimum of $6,000
per unit or 20 percent of adjusted basis, whichever is greater, according to the rules in the federal tax code.
28
In
practice, renovation programs for resyndicated properties often are much greater than the statutory minimum.
Some owners interviewed about resyndicated projects pointed to construction budgets of $68,000, $80,000
and even $130,000 per unit. We saw a rehabilitation budget of more than $200,000 per unit for a small prop-
erty in a Mid-Atlantic city that was a school converted to residential use when originally placed in service. e
HFA had not yet allocated the requested 9-percent credits or approved the budget.
A variety of stakeholders inuence the required scope of renovations:
• First, state HFAs often have rehabilitation expenditure requirements that exceed the federal statute because
they want to be sure that properties remain in good condition for at least 15 years, and they think $6,000
per unit will not provide this.
• Second, all of the syndicators interviewed for this study about their current practices cited minimum reha-
bilitation requirements for new syndication deals that they would be willing to support. ese minimum
requirements ranged from $25,000 to $40,000 per unit. In contrast, in its early years, the LIHTC program
included many properties with more moderate levels of rehabilitation. Many of the industry participants
and observers interviewed for this study pointed to these moderate renovation projects as the most likely to
run into severe diculties before the end of the initial compliance period. e industry seems determined
not to make the same mistake again.
28. Requirements were increased to these levels in the 2008 HERA legislation. Previously, the requirement was $3,000/unit or 10
percent of adjusted basis.
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15 PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
59
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
• ird, the GPs of the new partnerships themselves want to be certain that properties will be in sound
operating condition for at least another 15 years. ey do not want to be faced with unexpected major
repair needs for which they often are required to cover part or all of the costs by the terms of partnership
agreements. GPs looking for cash ow or property management fees do not want to spend income on major
physical needs.
• Fourth, rehabilitation performed in the context of a resyndication will typically be subject to a much more
stringent level of oversight and reporting requirements (from investor LPs and possibly also the state HFA) than
renovation done without new tax credits. Other eyes may perceive and then require additional improvements.
• Fifth, some new subordinate debt sources, if they are involved, may require that the owners pay prevailing
wages, which are widely thought to be signicantly higher than unregulated construction wages.
• Finally, a major driver of renovation expenditures in resyndicated properties is the expected length of time
between rounds of recapitalization and repair. Conventional properties turn over every 3 to 7 years. Each new
owner brings new nancing and typically conducts a modest scope of repairs and improvements. LIHTC
properties, on the other hand, are not expected to have any renancing or recapitalization events before 15
years have elapsed. By the time the typical LIHTC property changes ownership, a typical conventional prop-
erty will have turned over three times—and undergone renancing and moderate renovation at each turn.
HOW COMMON IS RESYNDICATION OF LIHTC 15-YEAR PROPERTIES WITH NEW TAX CREDITS?
One brokerage rm that is active in the LIHTC market reports that the interest of buyers of tax credit proper-
ties in resyndicating them with new tax credits has uctuated over time. When the earliest LIHTC properties
were sold in the early 2000s, most without extended aordability restrictions because the tax credits had been
allocated before 1990, only 10 percent of them were resyndicated. en, from around 2005 to early 2008, as
much as 80 percent of the sales the rm brokered were to owners who intended to resyndicate. Tax credit pric-
ing was very favorable during that time period. As the price for tax credit from investors plunged, so too did
resyndications, which dropped to roughly 10 percent of sales. As of 2010 through 2011, the market for tax cred-
its has stabilized and, according to the brokerage rm, 15 to 20 percent of LIHTC sales are resyndicated.
Syndicator estimates of the current percentage of Year 15 properties that are resyndicated are similar, 15 to 20
percent. ey also agree that the portion was much lower during the period when tax credit pricing was unfa-
vorable, with one syndicator estimating 5 percent resyndication from 2007 through 2009.
e HUD LIHTC database permits us to identify some LIHTC properties that appear to have been resyn-
dicated with additional tax credits. When a property has a second placed-in-service date that is more than 10
years after the original date, we consider this a second use of LIHTC (rather than the correction of a data error
by the HFA). Because we have data only through 2008, and partial data for 2009, and because the data are
for properties placed in service, not those for which new tax credits have been approved and development is
under way, this information misses a great deal of activity that has taken place recently. Nonetheless, it shows a
gradual rise in second use of tax credits. Exhibit 6.1 is a map showing the states where second uses of LIHTC
had reached a new placed-in-service date as of 2008 through 2009.
Somewhat surprisingly, more of these properties with second LIHTC allocations had been new construction
when originally placed in service than had been rehabilitation, 58 versus 42 percent. If these limited data reect
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
60
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
real patterns, it appears that new allocations are not used primarily to meet the capital needs of properties for
which systems are reaching the end of their expected lives. ey are used more often by nonprot owners than
the percentage of all early year LIHTCs that had nonprot owners, 14 versus 10 percent. is makes sense,
since HFAs are likely to look favorably on applications from nonprots because of their concern for long-term
stewardship and their lower emphasis on nancial return via cash ow.
Exhibit 6.1. States With Properties With a Second LIHTC Allocation
Source: HUD National LIHTC Database
MAJOR RECAPITALIZATION WITH OTHER PUBLIC SUBSIDY
Properties sometimes are able to secure other, non-LIHTC forms of major public subsidy at Year 15 that make
recapitalization with tax credits unnecessary, even for properties that cannot meet their capital needs from re-
nancing supported by cash ow. One property, purchased from a nonprot owner in bankruptcy, was able to
secure more than $7 million in Neighborhood Stabilization Funds from a county government to perform a fairly
extensive renovation ($57,000 per unit), including security systems that the new owner deemed essential to tenant
recruitment and retention and a new community center. e property has a tiered rent structure that enables it
to reach some families with incomes considerably less than the LIHTC maximum and limits its cash ow. is
property was purchased for $0 by a joint venture between a private developer and the original syndicator, with the
HFA agreeing to roll over soft debt that had been part of the original nancing. It continues to operate subject to
the original long-term use restrictions required by both LIHTC and the soft debt from the state.
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15 PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
6.3 PROPERTIES REPOSITIONED AS MARKET-RATE HOUSING
By far the least common outcome for LIHTC properties is conversion to market-rate housing. None of the syndica-
tors or investors interviewed for this study could name more than one or two properties that had been repositioned
to serve as market-rate housing. ose we interviewed had handled, among them, more than 2,000 LIHTC prop-
erty dispositions—that is, transfers or sales of the LP interest to the GP or sales of the properties to a new ownership
entity. e nonprot syndicators said that none of their properties had been repositioned with above-LIHTC rents.
Sta of the major national broker interviewed most extensively for this study reported that very few sales to new
owners have involved repositioning and said that this has become even less common for properties LIHTC use
restrictions that extend to Year 30. Only a handful of owners have attempted to go through the QC process.
e Ernst & Young report, based on a much earlier and smaller set of dispositions, estimated that only 5 per-
cent of them involved conversions to market-rate housing, and that was at a time (through 2006) when proper-
ties were likely to have been subject only to 15-year LIHTC restrictions.
Among the very few examples that syndicators and brokers were able to tell us about were a property that was
repositioned at the end of use restrictions that lasted only 15 years and a few properties that had gone through
the QC process. Two other properties had gone through foreclosure and probably were still operating as rental
housing, but perhaps not at rents below the LIHTC maximum.
e property subject to only 15-year restrictions is in Puerto Rico and dated from the earliest days of the LIHTC
program. e original sponsor took advantage of the development’s excellent location and converted the property to
condominiums. Sales proceeds were shared between the GP and the LPs. e conversion was completed in 2007.
PROPERTIES REPOSITIONED THROUGH THE QC PROCESS
When originally created, the QC process was seen as a mechanism that would balance preserving aordability
of LIHTC properties with a way to give owners a back-end possibility of at least some prot. e data from
the interviews conducted for this study suggest that few QC sales have occurred nationwide, and sales that are
occurring may be concentrated in a few states. Owners are more likely to go through the QC process seeking
relief from the LIHTC restrictions than with the expectation of receiving the proceeds of a QC sale. We heard
that some owners start the QC process hoping it will give them leverage with the HFA in applying for a new
allocation of 9-percent tax credits.
One property in a Central Plains state had a history of high occupancy and largely successful operations. e
owner submitted a QC proposal to the state. No buyer was found, so the owner was ultimately allowed to
extinguish the extended use requirements. e property was sold to a third party, netting a prot of roughly $1
million for the original LPs. It is not clear whether ongoing rents for this property, which is now unregulated,
remain within LIHTC program limits. If so, it would be because of market limitations.
One large LIHTC owner, an LP in several tax credit properties, is winding down its portfolio of properties,
except in markets where the units provide CRA credit. is owner described most of his properties as having
no value to the LP after paying o the mortgage, the GP’s support loans, and developer fees. However, 20 per-
cent of the properties have substantial remaining value, and his rm’s approach to selling its interests in these
properties always includes considering a QC process and applying for the process in cases where the QC price is
higher than market value.
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
62
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
An owner’s decision on whether to apply for relief from LIHTC use restrictions by requesting a QC sale must
take into consideration the process set up by the particular HFA with jurisdiction over the property. Some
states appear to have deliberately made the QC process dicult to prevent LIHTC properties from leaving the
aordable housing stock. In Texas, for example, this large investor in LIHTC properties considers the QC pro-
cess unworkable. He said, “We have GPs who have spent hundreds of thousands of dollars trying to go through
the QC process and ultimately given up.” He noted that investors believe they are entitled to a fair QC process,
but are unwilling to challenge a state that may intentionally be making the process dicult—for example,
through a lawsuit.
In another example, use restrictions were extinguished on a 57-unit property in the Midwest through the QC
process, and then the property was sold. e property struggled nancially during the compliance period, with
a loan at 8.6-percent interest that could not be renanced. e owner’s decision to apply for the QC process
was purely nancial: the selling broker’s opinion was that the property was worth about 15 percent more if use
restrictions were lifted. e HFA was unable to nd a buyer at the QC price, which was well more than market
value, so the use restrictions were lifted. e property is currently in a 3-year decontrol period during which
aordable units are converting to market rate. e former owner said about the QC process, “It was a simple,
smooth process.”
e units had been renting at well below maximum LIHTC rents, and the former owner believes the new
owner will do substantial renovations—which are badly needed—and raise rents to encourage income-qualied
renters to leave. e rent increase may be temporary; rents may revert to previous levels or lower after the
controlled units have turned over. In this area, market-rate rents for units that are larger and newer than in this
property are still below maximum permitted LIHTC rents. However, employment prospects in the area are
improving, and the lack of use restrictions gives the new owner exibility to raise rents in the future.
Another owner, also in a state in the Midwest, is partway through the QC process on a 112-unit property that
was placed in service in three phases. e rst phase has already been released from use restrictions by the state
HFA through the QC process and is in a 3-year decontrol period. e remaining two phases are in the pro-
cess of being released from use restrictions, also through the QCP. e owner, who operates primarily in the
Midwest, has met little resistance in pursuing the QC process: “So long as it doesn’t hurt the aordable housing
market, we haven’t had much pushback [from the HFA],” he said.
e owner’s goal is always to convert properties to market rate after their 15-year compliance period has ended.
After use restrictions have been lifted on all three phases of this particular property, the owner plans to sell it.
e decision is nancial, but is not driven by dierences between market rents and LIHTC rents, but rather by
savings on compliance costs. In this market, tax credit rents are less than market rents by only about $20 per
unit, but the owner described needing an additional sta person per property to do the work of verifying ap-
plicant and tenant incomes and meeting other reporting requirements.
Some HFAs are using the QC process as a way to help properties in weak housing markets remain nancially
viable. After the HFA fails to nd a QC buyer, the owner of the property is able to reach a slightly expanded
pool of potential tenants and, sometimes, to charge rents that are only slightly more than the LIHTC maxi-
mum. For these properties, local conditions will limit rents to aordable levels for the foreseeable future, espe-
cially if the relatively low LIHTC maximum rents (based on AMI) in these areas are taken into account.
An example involves two adjoining properties in a small city in the Upper Midwest. One of these properties
had no extended use restrictions. e original sponsor eliminated the use restrictions on the second property
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15 PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
by going through a QC process. e original owners were then able to sell both properties without any use
restrictions in place. e purchasers made some modest improvements to the properties and added some ameni-
ties, and then repositioned them to serve a slightly higher income demographic. e dierential between rents
available under the LIHTC program and market rents was not great, but repositioning allowed the new owner
to achieve slightly higher rents and to recruit from a much wider range of potential tenants.
In another example, an Ohio property struggled to maintain occupancy in a weak local market with a glut of
comparatively new multifamily housing development. e GP appealed for QC regulatory relief to expand the
pool of eligible renters. He described having to turn away many households whose income narrowly exceeded
the LIHTC limits. Cash ow at this property had been negative for several years, and the LPs and GPs had
contributed hundreds of thousands of dollars to keep the property operating. e owner is hoping that the abil-
ity to rent to a wider range of tenants will help the development to improve occupancy and restore it to nan-
cial health. is is not the only property in Ohio for which the state HFA has worked through the QC process
cooperatively to relax LIHTC rules in troubled housing markets.
PROPERTIES REPOSITIONED FOLLOWING FORECLOSURE
Another outcome sometimes seen for LIHTC properties in weak markets is nancial failure. Foreclosure of the
loan on the property is followed by a property disposition by the lender to a new owner who will operate the
property as market-rate housing at higher rents.
An example is a large property in a oundering market in Florida. After the development’s initial nancial failure,
the mortgagee (the state HFA) foreclosed on the property and extinguished all use restrictions. e property was
then sold at bargain price. e new owner is phasing out aordable rents over 3 years, with the plan of making
improvements to attract market tenants and achieving protability when the market eventually improves.
Another example is the property discussed in chapter 5.1, a historic hotel that had been turned into senior hous-
ing and experienced both physical problems and a collapsing market. e rst mortgagee received a deed in lieu
of foreclosure, and the property no longer is in the aordable housing stock.
REPOSITIONING IS LIMITED BY MARKET RENTS
We asked each of the 37 owners we interviewed whether market rents for the property were higher than the
LIHTC maximum rents. Only 13 of the owners we interviewed said that they were higher. e other 24 said
that LIHTC maximum rents were comparable to market rents or higher than market rents.
Some examples of properties where market rents are indistinguishable from LIHTC rents, from owner inter-
views conducted for this study are—
• A 100-unit property in an industrial city in the Midwest, where the market has softened considerably in
the wake of auto industry upheavals, was purchased after 15 years by the original GP for the existing debt
and maintained at the same rent levels, which were lower than LIHTC maximums.
• A 64-unit property in the Rocky Mountain states, in a small city largely supported by tourism, was bought by
a new operator after Year 15 but maintained at the same LIHTC rent levels, which are at about market rates.
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
64
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
• Two adjoining properties with a total of 156 units in an inner suburb of a major city in the Southwest were sold
to new owners, who performed a modest level of rehabilitation to make the development competitive with others
in the area. ey continue to rent the units at LIHTC rents, which are similar to market rent levels.
PROPERTIES NO LONGER UNDER MONITORING BY HFAS
We may have simply missed properties that have left the aordable stock, given the nature of the data we col-
lected for this study. Syndicators, investors, and even brokers may simply not know about LIHTC properties
that have been converted to above-LIHTC market rents. HFAs that helped us nd owners to interview are
unlikely to have ongoing relationships with owners of properties that have been repositioned.
erefore, we focused on the set of properties that, according to data submitted by the HFAs, are no longer
monitored for compliance with LIHTC rules and conducted two types of analysis.
First we matched the addresses of LIHTC properties without project-based rent subsidies or Section 515 to
HUD’s administrative data on the addresses of households using Housing Choice Vouchers as of 2010. e
premise is that, if households with vouchers can aord to live in the property and the owner is accepting them,
the property provides housing that can be made available to low-income renters, although they may need rental
assistance to make the housing aordable.
29
e results of that data match are shown in exhibit 6.2. at data
match shows that, even among properties that are not reporting to HFAs, nearly 30 percent have at least one
voucher holder renting in the property. e rate of voucher use is only slightly lower than for properties that are
reporting to HFAs, which is 36 percent.
Properties with the earliest placed in service years, likely to have only 15-year restrictions, are less likely to have
voucher users than those placed in service in 1992 through 1994 (39 percent), but 28 percent do have voucher users.
30
29. Many tenants may need rental assistance to be able to aord LIHTC units even during the period when the units are subject to
the program’s rent restrictions.
30. For properties not reporting to HFAs, the dierence in the percent of properties with at least one voucher household from the
earlier years compared to the later years is statistically signicant.
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15 PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
65
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
Exhibit 6.2. Presence of Housing Choice Voucher Households in Earliest LIHTC Projects Properties
Placed in Service 1987 rough 1994, Properties Without Rural Housing Service Section 515 Loans or
Project-Based Rental Assistance
Properties Reporting to HFAs Properties Not Reporting to HFAs
Property Has an
HCV Household
Property Has no
HCV Household
Total Number of
Properties
Property Has an
HCV Household
Property Has no
HCV Household
Total Number of
Properties
All properties 36% 64% 5,579 30%* 70% 2,907
Placed-in-service year
1987–1991 29% 71% 2,795 28% 72% 2,526
1992–1994 44% 56% 2,784 39% 61% 381
Nonprot sponsor 51% 49% 843 40%* 60% 182
No nonprot sponsor 35% 65% 4,736 30%* 70% 2,725
Poverty rate of 10 percent
or less 36% 64% 1,343 28%* 72% 642
Location type
Central city 38% 62% 3,351 33%* 67% 1,664
Suburb 37% 63% 1,317 27%* 73% 800
Nonmetropolitan 30% 70% 911 22%* 78% 443
Distribution by region
Northeast 47% 53% 792 37%* 63% 738
Midwest 30% 70% 2,134 25%* 75% 976
South 34% 66% 1,815 24%* 76% 817
West 49% 51% 838 43% 57% 376
HCV = housing choice voucher. LIHTC = Low-Income Housing Tax Credit.
*Dierence in the percent of properties not reporting to housing nance agencies (HFAs) with at least one voucher household and
properties reporting to HFAs with at least one Housing Choice Voucher (HCV) household is statistically signicant to the 95-percent
condence level.
Notes: Projects used for analysis include only records with placed-in-service year data. Missing data information is in appendix E.
Information on the use of project-based rental assistance, including state or federal project-based rental assistance, was rst collected
by the U.S. Department of Housing and Urban Development with the 2006 placed-in-service year. Some state allocating agencies
have been able to update this information for earlier placed-in-service years, but it is primarily missing for property records. To help
ll in information on the use of project-based rental assistance, LIHTC project addresses were matched against data in a le created
3/22/2010 of Multifamily Assistance & Section 8 Contracts. e address match conrmed the existence of a project-based rental assis-
tance contract but did not indicate that the LIHTC property did not have a federal project-based rental assistance contract. Because of
inconsistencies in the completeness and formatting of address data, LIHTC property records that did not match to a record in the le
of Multifamily Assistance & Section 8 Contracts may still have a federal or state project-based rental assistance contract.
Data on location type and poverty rate of 10 percent or less are based on LIHTC projects that were geocoded with census tracts from
the 2000 Census. e geocoding rate for projects placed in service from 1987 through 1994 was 88.9 percent. Central city locations
are based on central cities dened by 1999 metropolitan statistical areas (MSAs) dened by the Oce of Management and Budget.
Suburb locations are within an MSA but not in a central city. Nonmetropolitan locations are not in an MSA. Poverty rates are census
tract-level rates from the 2000 Census.
Presence of an HCV household residing in a LIHTC property was based on address matching. e data le of HCV households was
from December 2010. LIHTC properties were identied as having an HCV household if at least one HCV household address matched
to the representative LIHTC project address.
Source: HUD National LIHTC Database
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
Even in relatively high-income census tracts, those with poverty rates of 10 percent or less, 28 percent of non-
reporting properties have voucher users. Use of vouchers in nonreporting properties is more pronounced in the
Northeast and the West than in the South or West. is may reect the relatively higher costs of rental housing
overall in the Northeast and West, so that voucher holders are more likely to seek to rent in properties that were
developed under the LIHTC program.
31
Properties without voucher users may remain aordable because their rents are relatively low. ey may simply
have stopped reporting to the HFA because they are no longer required to do so. e most likely properties to
have been repositioned as unaordable, market-rate housing are properties in low poverty locations. To explore
further whether these properties have become unaordable, we conducted a survey of the rents of a sample of
properties no longer reporting to the HFA, with 20 or more units, and in census tracts with poverty rates below
10 percent. Properties with Rural Housing Service Section 515 Loans or that were found to have project-based
rental assistance were excluded. e resulting list was 234 properties. We did web searches for those proper-
ties based on property name and address to nd out their current rents, usually through a phone call to the
management oce. We asked for the rents of each unit size and the utilities that were tenant-paid. We found
current rents for 100 properties and then compared those rents (including both contract rent and an estimate
of tenant-paid utilities) with the LIHTC rent limit, 18 percent of AMI, (that is, 30 percent of 60 percent). We
found that, even for this group of properties that should be at particularly high risk of becoming unaordable,
nearly one-half had rents below the LIHTC maximum, and another 9 percent had rents only slightly more
than LIHTC rents (exhibit 6.3). For the properties with rents more than 105 percent more than LIHTC rents,
a small portion of the properties (15 percent) were known to include aordable rental units, as noted by the
property management oce.
32
Exhibit 6.3. Affordability of Properties in Low-Poverty Census Tracts and No Longer Monitored by HFAs
Property Rents
Greater than 105 Percent of LIHTC Rent Between 100 and 105 Percent of LIHTC Rent Less Than LIHTC Rent
42% 9% 49%
Notes: Surveyed projects included only those with at least 20 units for which we had data on the year placed in service and on whether
a tax credit project was being monitored for LIHTC compliance by the housing nance agency. Low-poverty census tracts were
dened as having a poverty rate of 10 percent or less based on 2000 Census data. Because criteria for inclusion in the survey included
census tract poverty rate, only geocoded properties were included. e geocoding rate for properties placed in service from 1987
through 1994 was 88.9 percent.
Source: HUD National LIHTC Database
Similar results on continued aordability were found by a rent survey conducted by the Shimberg Center at the
University of Florida of the rents of Florida properties that formerly were in one of several federal and state sub-
sidy programs and left the program between 2000 and 2008. More than one-half (57 percent) of properties for-
merly subject to LIHTC rent restrictions (not including those properties that had other forms of subsidy with
lower aordability standards) still were renting at or below the LIHTC maximum rent (Blanco et al., 2011).
31. For properties not reporting to HFAs, the dierence in the percent of properties with at least one voucher household by region is
statistically signicant.
32.
Looking at the unit mix when these properties were rst placed in service with tax credits, about a quarter of the properties were
mixed LIHTC/market properties. e properties we found to have rents that are greater than 105 percent of the LIHTC standard
were more likely to have been mixed LIHTC/market properties than those properties with rents at or less than the LIHTC
standard, 34 percent compared to 20 percent.
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15 PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
67
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
6.4 WHAT WILL HAPPEN WHEN THESE PROPERTIES REACH YEAR 30?
So far this discussion has focused on what has happened at around Year 15 to LIHTC properties that were
placed in service between 1987 and 1994. Some of those properties were subject to extended LIHTC use
restrictions because their tax credits were allocated by the state HFAs in 1990 or later. As exhibit 6.4 shows, of
the 5,841 such properties (with a total of 230,496 units), most were placed in service between 1992 and 1994.
e extended use restrictions were to last until Year 30, unless the owner of the property was able to receive
relief from the LIHTC income and rent restrictions from the QC process.
Exhibit 6.4. Extended Use Period Expiration of LIHTC Properties Placed in Service, 1990 rough
1994, With Extended Use Restrictions
Placed-in-Service Year 1990 1991 1992 1993 1994 1990–1994
Extended-Use Period Expiration
2020 2021 2022 2023 2024 2020–2024
Projects
Units
Projects
Units
Projects
Units
Projects
Units
Projects
Units
Projects
Units
Allocation Year
1990
530
17,799
519
17,583
249
15,859
32
1,642
1
32
1,331
52,915
1991
641
18,927
721
22,960
510
28,685
31
2,892
1,903
73,464
1992
391
10,743
543
21,757
486
25,950
1,420
58,450
1993
301
9,964
558
22,847
859
32,811
1994
328
12,856
328
12,856
1990–1994
530
17,799
1,160
36,510
1,361
49,562
1,386
62,048
1,404
64,577
5,841
230,496
LIHTC = Low-Income Housing Tax Credit.
Source: HUD National LIHTC Database
Notes: Projects used for analysis include only records with placed-in-service year data and tax credit allocation or award year. Missing
data information are in appendix E. Data on whether a tax credit project was being monitored for LIHTC compliance are based on
information provided by state allocating agencies.
For LIHTC projects allocated tax credits in 1990 and later, use restrictions expire 30 years following the placed-in-service date.
Speculating on what will happen at Year 30 to the early year properties with extended use restrictions is di-
cult. e earliest properties will reach Year 30 in 2020, and most will reach the end of extended use restrictions
only beginning in 2022, 10 years from now. Many things may change in 10 years: housing markets will change
in ways that are particularly dicult to predict in the wake of the turmoil of the past few years; resources
available to support aordable rental housing may change, because of federal policy shifts, shifts in nancial
markets, or both; and state policies for using LIHTC and other public subsidy resources under state control
also may change. Nonetheless, we will attempt some observations about what may happen when the properties
placed in service through 1994 with extended use restrictions reach Year 30.
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
68
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
WHAT WILL THE OUTCOMES BE AS OF YEAR 30?
Basing our analysis on patterns we observed for what happened when these properties passed Year 15, we expect
that, by the time properties placed in service in the early to mid-1990s reach Year 30:
Some additional properties will have been repositioned in the market and no longer provide affordable rental housing
because they will have gone through the QC process. However, we do not expect a large percentage of owners to
seek QC sales and to succeed in obtaining relief from LIHTC restrictions before they reach Year 30. Moreover,
as discussed elsewhere in this report, until now a large proportion of properties that have successfully gone
through the QCP have been in weak markets where owners have sought regulatory relief while continuing to
have rents within LIHTC limits.
Some additional properties will have been recapitalized with new tax credits. Although the number doing so will
not be trivial, it will not be most of the properties. HFAs will have competing priorities for 9-percent credits, and
many properties will not be suitable for 4-percent credits and bond nancing. Some owners will not want to com-
mit to another 30 years of LIHTC use restrictions that will come with a new allocation of tax credits.
Some properties will have been refinanced based on cash flow. Despite the LIHTC use restrictions, some proper-
ties in some housing markets generate sucient cash ow to follow the pattern of periodic renancing to meet
capital needs, sometimes with an ownership change, that is typical of private market real estate.
A large number of properties, probably the majority, will have large unmet capital needs. All properties will be at
least 30 years old. Some will be older and will not have had all systems replaced before they were placed in
service under LIHTC. Properties that have aged for 30 years and have not had major capital improvements will
need to replace major systems such as wiring, plumbing, heating, and roofs; most will also need to upgrade n-
ishes, cabinets and appliances. Regardless of their nancial condition or market location, few—if any—proper-
ties will be able to cover their capital needs from reserves.
Ownership patterns will vary. Properties with nonprot owners will almost all still have nonprot owners, usu-
ally the same as the original developer that placed the property into service under LIHTC. Some for-prot
owned properties will still be owned by entities that include LP investors, but many will have simpler ownership
structures. e original for-prot developer likely will continue to be the owner for many properties. Others
will have been sold, for a variety of reasons. e property may have been attractive to new owners because of
positive cash ow, and the original owner may have decided it was time to realize value or may have changed its
business focus. Or a new owner may have taken over a nancially troubled property with the intention of run-
ning it more eciently or applying for additional subsidies.
Exhibit 6.5 shows the characteristics of the projects that were placed in service in the early years of the LIHTC
program, through 1994, with use restrictions that extend for 30 years. Among the notable characteristics of this
slice of LIHTC properties are the very large number of properties (more than one-third) and units (about a one-
fourth) that also have Rural Housing Service (RHS) Section 515 loans. ose properties are not the primary
focus of this study.
33
33. Section 515 loans made after 1989 did not include a right to prepay. Of the roughly 16,000 properties in the entire RHS 515
portfolio, it has been estimated that about 10 percent have an economically viable prepayment option, primarily those in
urbanizing areas. (ICF Consulting, 2004)
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15 PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
69
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
Exhibit 6.5. Characteristics of Early Year LIHTC Properties With Use Restrictions Expiring,
2020 rough 2024
Projects Units
Number of projects and units 5,841 230,496
Average project size and distribution 39.8
0–10 units 26.9%
11–20 units 13.5%
21–50 units 39.2%
51–99 units 11.1%
100+ units 9.3%
100.0%
Construction type
New construction only 62.6% 57.8%
Rehabilitation 37.4% 42.2%
100.0% 100.0%
Nonprot sponsor 14.7% 17.7%
RHS Section 515 34.5% 24.6%
Tax-exempt bond nancing 3.1% 9.6%
Location type
Central city 43.6% 50.0%
Poverty rate of 10 percent or less
12.9% 16.7%
Poverty rate greater than 10 percent 87.1% 83.3%
Suburb 25.3% 30.0%
Poverty rate of 10 percent or less
51.5% 52.3%
Poverty rate greater than 10 percent 48.5% 47.7%
Nonmetropolitan 31.1% 20.0%
Poverty rate of 10 percent or less
23.9% 23.9%
Poverty rate greater than 10 percent 76.2% 76.1%
100.0% 100.0%
Poverty rate of 10 percent or less 26.1% 28.8%
Percent of units with two or more bedrooms 54.5%
RHS = Rural Housing Service.
Notes: Projects used for analysis include only records with placed-in-service year data and tax credit allocation or award year. Missing
data information are in appendix E. Data on whether a tax credit project was being monitored for LIHTC compliance are based on
information provided by state allocating agencies.
Data on location type and poverty rate of 10 percent or less are based on LIHTC projects that were geocoded with census tracts from
the 2000 Census. e geocoding rate for projects placed in service from 1987 through 1994 was 88.9 percent. Central city locations
are based on central cities dened by 1999 metropolitan statistical areas (MSA) dened by the Oce of Management and Budget.
Suburb locations are within an MSA but not in a central city. Nonmetropolitan locations are not in an MSA. Poverty rates are census
tract-level rates from the 2000 Census.
Source: HUD National LIHTC Database
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
70
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
HOW WILL PATTERNS SHIFT AFTER YEAR 30?
e three patterns observed at or somewhat after Year 15 will continue beyond Year 30: (1) some properties
will continue to provide aordable rental housing, despite the absence of LIHTC use restrictions; (2) some will
be recapitalized with public subsidies that bring new use restrictions; and (3) some will be repositioned with
rents that are substantially higher than LIHTC-restricted rents or will no longer be rental housing. e balance
among those three outcomes will shift after Year 30 in favor of the third pattern—repositioning and no longer
aordable—but how much?
PROPERTIES THAT CONTINUE TO OPERATE AS AFFORDABLE HOUSING
is is likely the most common pattern for the early year LIHTC stock, despite the expiration of extended
LIHTC use restrictions at Year 30.
Several types of properties will almost certainly not be repositioned. ese properties include those with the
following characteristics—
• A mission-driven owner. is includes the 15 percent of properties placed in service through 1994 with 30-
year use restrictions that have nonprot owners (exhibit 6.5).
• Location in a state or city where use restrictions extend beyond Year 30. is includes properties in three of the
places where LIHTC properties are most likely to have greater value if no longer restricted: New York City,
California, and Massachusetts.
• e presence of use restrictions associated with financing. is includes properties placed in service a second
time under LIHTC. Some properties have other use restrictions—for example, use restrictions associated
with land acquisition or with a source of debt that carries a use restriction with a very long term limit.
Owners of the remaining properties—for-prot owners of properties with no use restrictions continuing
beyond Year 30—are likely to make a nancial calculation about what to do with the property that depends
on the housing market. e key consideration is whether the location will support market rents substantially
higher than LIHTC rents. e large portion of LIHTC developments that have rents similar to unrestricted
rents at about the middle of the housing market will continue to be aordable after the end of their use restric-
tions since the market will not sustain much higher rents.
ese properties will now be 30 years old and, even if kept in good condition through cycles of renancing and
capital investment, may have drifted down in value in comparison with newer nearby rental housing. Relief
from LIHTC restrictions will broaden the market for this housing to include students and those with incomes
that are higher than the LIHTC income limits. e properties are likely to continue to provide rental housing
and to do so at rents that families and individuals with modest incomes (around the LIHTC income standard
of 60 percent of AMI) can aord. In many locations, they also will be available to households seeking private
rental housing in which to use an HCV or similar tenant-based rent subsidy. e obligation that LIHTC prop-
erties have to accept voucher holders who pass regular landlord screening will cease, but many owners will be
accustomed to renting to voucher holders and will appreciate the broadening of the market for their housing to
include households that otherwise could not aord the rent.
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15 PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
71
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
Some properties with use restrictions that will expire starting in 2020 will have agreed to rents below both the
LIHTC maximum and what the property would be able to charge without restrictions, either for the entire
property or for “tiers” of units. ose agreements may have been made to make the project competitive for
9-percent tax credits in the state, or they may have been associated with soft debt. Although this was less com-
mon for early year LIHTC properties than it became later, some properties placed in service in 1994 or earlier
are of that type. At Year 30, those properties may be able to raise rents to something closer to the LIHTC maxi-
mum—which will still provide aordable housing to households with incomes around 60 percent of AMI and
will still be potentially available to households using tenant-based vouchers.
Another group of properties will continue to have aordable rents, but the rents they are able to charge with or
without LIHTC restrictions are substantially below maximum LIHTC rents. ese properties may have a di-
cult time producing enough cash ow to meet their operating needs and remain in even passable condition. As
noted in a previous section, LIHTC rents—pegged to AMI—do not mean the same thing everywhere. In some
locations, even rents at or only slightly below the LIHTC standard may produce inadequate cash ow—for
example, properties in rural areas, in soft housing markets such as some midwestern communities, and in other
places with declining populations. Some properties will be protected by having project-based Section 8 subsi-
dies that have been set, administratively, at a level higher than competitive market rents.
34
Both HFAs and the
federal government are likely to come under pressure to make additional subsidy resources available for these
properties as their growing capital needs become apparent.
PROPERTIES RECAPITALIZED WITH NEW INFUSIONS OF LIHTC OR SIMILAR SUBSIDY
Even before properties with extended use restrictions reach Year 30 and are “at risk” of leaving the aordable
housing stock, unmet capital needs will induce many of these properties—especially those in market areas that
are not high in value and are not trending up—to apply to their HFAs for additional allocations of LIHTC.
Some properties may be able to use bond nancing and 4-percent credits. How HFAs will respond to this de-
mand and assess its priority compared with other potential uses of LIHTC is dicult to predict. After Year 30,
applications for new tax credits will come with the additional rationale that the property is at risk of becoming
unaordable—a point that may or may not be accurate for the particular property.
PROPERTIES THAT NO LONGER PROVIDE AFFORDABLE RENTAL HOUSING
For this group, market equivalent rents—or the value of converting the property to homeownership or com-
mercial use—will be substantially higher than LIHTC rents, and the property is likely to be repositioned in the
market within a fairly short period of time after the expiration of 30-year use restrictions. We can make only a
very general estimate of how many properties fall into this category. It could be true of the 12.9 percent of the
properties that are in central cities and the 51.5 percent in suburban locations that are in middle or middle or
upper income census tracts with poverty rates of 10 percent or less (exhibit 6.5). is is only a rough indicator,
but the number of properties, 960 (840 without a nonprot sponsor), and the number of units, about 50,000
(42,700 without a nonprot sponsor), is not huge. e modest numbers make preserving those properties a
feasible policy objective, for which we make recommendations in the conclusion to this report.
34. From this study’s interviews with syndicators and other experts, we know that many early year properties had project-based
Section 8 subsidies. e HUD LIHTC database does not have sucient data on the use of project-based rental assistance for
early year properties to support a numerical estimate, so we do not include one in exhibit 6.5.
PATTERNS FOR LIHTC PROPERTIES AFTER YEAR 15
72
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
LATER LIHTC PROPERTIES: WILL WE SEE THE SAME PATTERNS GOING FORWARD?
73
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
7. LATER LIHTC PROPERTIES: WILL WE SEE THE
SAME PATTERNS GOING FORWARD?
Approximately 1.5 million housing units in more than 20,000 LIHTC properties were placed in service from
1995 through 2009 and will reach their 15-year mark between 2010 and 2024. How likely are those properties
to follow the patterns that we observed around Year 15 for the early year LIHTC properties? Are they more or
less likely to continue to operate as aordable rental housing, without major recapitalization? Are they more or
less likely to be recapitalized with new allocations of tax credits? And, nally, are they more or less likely to be
repositioned as market-rate housing with higher rents?
Exhibit 7.1 provides the information available from the HUD LIHTC database for comparing properties placed
in service between 1995 and 2009 with those placed in service earlier. e data show some notable dierences.
We also know about other dierences that are not measured by the database, but that were evident from the
syndicator, investor, and expert interviews conducted for this study.
LATER YEAR PROPERTIES ARE MUCH LESS LIKELY TO HAVE RURAL HOUSING SERVICE SECTION 515 LOANS
In the early years of the program, the LIHTC was heavily used together with Rural Housing Service (RHS)
Section 515 loans. e HFA-supplied data in the HUD LIHTC database show that nearly one-third of all
properties had this nancing, 31.1 percent (exhibit 7.1). Between 1995 and 2009, only 9 percent tapped this
RHS nancing. e heavy use of LIHTC with Section 515 is reected in the greater percentage of properties in
nonmetropolitan locations in the early years. is combination of funding sources also dropped because of the
declining fortunes of the Section 515 program. In 1995, funding for the Section 515 program was cut dramati-
cally and has never been restored, and the program recently has produced only a few hundred units each year
(Rapoza, 2006).
35
We deliberately did not focus on the Section 515 component of the LIHTC program in this study, because we
considered those properties at less nancial risk and also at less risk of being repositioned. Original Section 515
loans had 40- and 50-year terms, and the process of prepaying the loan—and thus removal of aordability
restrictions—is complex. In general, owners of projects that received loans between 1979 and 1989 can request
prepayment, although there are a number of restrictions and some incentives oered to owners encourage
aordable housing preservation. Section 515 mortgages received before 1979 can be prepaid largely without
restriction, and mortgages made after 1989 cannot be prepaid (George, 2007). We asked syndicators to talk to
us about properties without Section 515 loans, but many told us that housing in this program was heavily repre-
sented in their early year LIHTC portfolios.
While it is not unknown for properties that have Section 515 loans to leave that program to seek higher rents,
overall the smaller proportion of later year properties with this nancing increases the number of properties with
owners who might try to use the Qualied Contract (QC) process to end LIHTC use restrictions. Exhibit 7.1 also
shows the characteristics of the approximately 19,000 later year properties that were not nanced with Section 515.
35. In scal year 2006, Congress provided less than $100 million for the Section 515 program.
LATER LIHTC PROPERTIES: WILL WE SEE THE SAME PATTERNS GOING FORWARD?
74
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
Exhibit 7.1. Characteristics of LIHTC Properties Placed in Service, 1987 rough 1994 and 1995 rough 2009
All Properties Properties without RHS Section 515 Loans
1987–1994 1995–2009 1987–1994 1995–2009
Number of projects 11,543 20,567 8,817 18,967
Number of units 411,412 1,521,901 331,795 1,467,055
Average project size and distribution 36.4 74.8 38.7 78.3
0–10 units 33.5% 5.9% 42.5% 6.2%
11–20 units 13.2% 9.4% 11.4% 8.6%
21–50 units 35.2% 37.2% 23.5% 34.5%
51–99 units 9.5% 23.5% 11.5% 24.8%
100+ units 8.6% 24.0% 11.1% 25.9%
100% 100% 100% 100%
Construction type
New construction only 56.7% 63.3% 47.2% 64.9%
Rehabilitation 43.3% 36.7% 52.8% 35.1%
100% 100% 100% 100%
Nonprot sponsor 10.1% 27.6% 12.7% 28.6%
RHS Section 515 31.1% 9.0% -- --
Tax exempt bond nancing 3.1% 21.7% 4.1% 22.9%
Project-based rental assistance NA 32.4% NA 31.6%
Home funds NA 23.1% NA 23.1%
CDBG funds NA 5.6% NA 5.7%
Location type
Central city 46.6% 45.1% 58.5% 48.5%
Suburb 25.9% 30.9% 25.0% 31.2%
Nonmetropolitan 27.5% 24.0% 16.5% 20.3%
100% 100% 100% 100%
Poverty rate of 10 percent or less 24.9% 29.8% 23.2% 29.8%
Percent of units with two or more bedrooms 54.5% 64.4% 58.3% 64.8%
CDBG = Community Development Block Grant. LIHTC = Low-Income Housing Tax Credit. RHS = Rural Housing Service.
Notes: Projects used for analysis include only records with placed-in-service year data. Missing data information are in appendix E.
Information on the use of project-based rental assistance, including state or federal project-based rental assistance, was rst collected
by the U.S. Department of Housing and Urban Development with the 2006 placed-in-service year. Some state allocating agencies
have been able to update this information for earlier placed-in-service years, but it is primarily missing for property records.
Data on location type and poverty rate of 10 percent or less are based on LIHTC projects that were geocoded with census tracts from
the 2000 Census. e geocoding rate for projects placed in service from 1987 through 1994 was 88.9 percent. e geocoding rate for
projects placed in service from 1995 to 2009 was 93.5 percent. Central city locations are based on central cities dened by 1999 met-
ropolitan statistical areas (MSAs) dened by the Oce of Management and Budget. Suburb locations are within an MSA but not in a
central city. Nonmetropolitan locations are not in an MSA. Poverty rates are census tract-level rates from the 2000 Census.
Source: HUD National LIHTC Database
LATER LIHTC PROPERTIES: WILL WE SEE THE SAME PATTERNS GOING FORWARD? LATER LIHTC PROPERTIES: WILL WE SEE THE SAME PATTERNS GOING FORWARD?
75
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
A SUBSTANTIAL PORTION OF LATER YEAR PROPERTIES HAVE PROJECT-BASED RENTAL ASSISTANCE
Nearly one-third of later year LIHTC properties have project-based rental assistance (exhibit 7.1). In this case, we
cannot make a direct comparison between properties placed in service between 1987 and 1994 and those placed in
service later. is property characteristic was not included in the original data collection for the early year proper-
ties, and eorts to ll in that information retrospectively were not successful.
36
e syndicator and investor inter-
views, however, suggest that an even higher portion of the early year LIHTC program was linked to project-based
rental assistance. In addition, when seeking to interview owners of early year properties, we often were told that an
owner’s early year LIHTC portfolio consisted entirely of properties with Section 8 contracts.
37
We focused data collection for this study away from Section 8 properties, because owners of most properties
with rental assistance consider it very valuable and do not attempt to end their Section 8 contracts and reposi-
tion the housing to serve a higher income group of tenants at higher rents. An owner we interviewed about
a LIHTC property that turned out to have project-based Section 8 said that competitive market rents in the
property’s location would have been lower than the rents permitted by HUD under the Section 8 contract.
e continued high percentage of LIHTC properties with project-based rental assistance reduces the number of
properties likely to be repositioned as market-rate housing.
LATER YEAR PROPERTIES ARE LIKELY TO BE LARGER
e average size of a LIHTC property was 75 units in the later years, compared with only 36 units in the 1987
through 1994 period. Perhaps more important, nearly one-fourth of later year properties have 100 or more
units, compared with only 8.6 percent in the earlier years (exhibit 7.1). is, together with the continued preva-
lence of rental assistance, may mean that many later year properties will have both the scale and the stream of
rents needed for potential bond nancing with 4-percent tax credits. As discussed in the next section, however,
other features of later year properties may make them less suitable for bond nancing.
LATER YEAR PROPERTIES ARE MORE LIKELY TO HAVE BEEN NEWLY CONSTRUCTED WHEN PLACED
IN SERVICE AND, IF REHABILITATED, MORE LIKELY TO HAVE HAD SUBSTANTIAL WORK DONE
e percentage of LIHTC properties that were new when placed in service rose somewhat, from 57 percent in
the early years to 63 percent from 1995 through 2009. Not counting Section 515 properties, the increase was
larger, from 47 percent new to 65 percent new (exhibit 7.1).
Not available from the HUD LIHTC data, but a common theme in the syndicator, investor, and expert interviews
is that many fewer later year properties were placed in service with only moderate levels of renovation supported
36. In addition to attempting to collect this information retrospectively from HFAs, we attempted to match data to HUD
administrative data. e number of properties positively identied as having project-based rental assistance in the early years was
too small to be credible.
37. e Section 8 Moderate Rehabilitation program was still active in the earliest years of LIHTC, and many owners who
participated in that program were able to obtain LIHTC allocations, in part because the development process was already under
way and HFAs considered that the properties would be completed and placed in service within the required time. e early
year LIHTC program also coincided with eorts to preserve older Section 8 and other assisted properties through federal grant
programs. LIHTC allocations frequently were obtained for those properties as well (ICF, 1991).
LATER LIHTC PROPERTIES: WILL WE SEE THE SAME PATTERNS GOING FORWARD?
76
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
by LIHTC and other nancing. is was discussed in chapter 6.2 in connection with the levels of rehabilitation
now required when early year LIHTCs are resyndicated with second allocations of LIHTC. e higher renovation
standards for later year LIHTCs reect the shared perception of owners, syndicators/investors, and HFAs: when
housing receives only modest renovations, it is more likely to encounter major physical problems.
With more properties that were newly built when placed in service, and with higher levels of renovation for
rehabilitated properties, later year LIHTCs should be less likely to seek new allocations of tax credits because
they have substantial capital needs at Year 15 and more likely to keep operating as aordable housing without
recapitalization. Addressing a backlog of capital needs is not the only reason owners seek to resyndicate proper-
ties with additional tax credits, however, as discussed in chapter 6.2. Owners may want to upgrade the housing
to keep it competitive or simply to earn the fees that are associated with a new redevelopment eort.
MANY MORE LATER YEAR LIHTC PROPERTIES HAVE NONPROFIT SPONSORS
During the 1987 through 1994 period, only 10.1 percent of LIHTC properties had nonprot sponsors (General
Partners), barely exceeding the minimum target required of LIHTC allocators by the tax credit law. In contrast,
between 1995 and 2009, nearly 28 percent of all properties placed in service under LIHTC had nonprot spon-
sors (exhibit 7.1). is set of owners is highly unlikely to attempt to reposition properties as market-rate housing
with higher rents. Instead, at the end of the rst 15 years, the nonprot General Partners (GPs) will buy out the
Limited Partner (LP) interests for most of these properties and continue to operate them as aordable housing.
Adding together the later year properties with nonprot owners and those with for-prot owners and project-
based rental assistance, more than one-third of LIHTCs placed in service during the 1995 through 2009 period
(34.7 percent) are highly unlikely to seek to reposition their properties as market-rate housing by going through
the QC process for relief from LIHTC restrictions.
LATER YEAR LIHTC PROPERTIES ARE LIKELY TO HAVE OWNERSHIP STRUCTURES THAT MAKE IT EASY
FOR THE GENERAL PARTNER TO BUY THE LIMITED PARTNER INTERESTS
For-prot as well as nonprot owners of later properties may nd it easy to buy out the LPs for outstanding
debt. Syndicators and industry observers describe a shift over time in the nature of LIHTC investment agree-
ments. In later years, as investor competition to purchase LIHTC equity intensied, “back-end” dynamics
moved decidedly in favor of GPs. e industry has evolved to the point that benets oered to investors now
often include little or no residual value or return of capital.
With a sales price no greater than the outstanding mortgage, many of these continuing owners will be able to con-
tinue to operate the property as aordable housing without a major recapitalization. However, the ability to renance
and the availability of cash ow may be complicated by the property’s nancial structure and target population.
LATER LIHTC PROPERTIES: WILL WE SEE THE SAME PATTERNS GOING FORWARD? LATER LIHTC PROPERTIES: WILL WE SEE THE SAME PATTERNS GOING FORWARD?
77
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
LATER TAX CREDIT PROPERTIES HAVE MORE COMPLICATED RENT STRUCTURES AND MORE COMPLI-
CATED FINANCING
Many of the early year LIHTC projects proled as part of this study were nanced simply, with debt and tax
credit equity, but with relatively smaller amounts of debt and larger amounts of equity than would be expected
in conventional real estate. Debt for these projects was typically provided either by commercial lenders or by
HFAs. Furthermore, many early year projects established aordability at the level required by the federal tax
code—that is, they simply agreed to charge rents that were no more than 30 percent of 60 percent of Area
Median Income (AMI).
As the LIHTC program matured, project nancing became considerably more complex. By the mid-1990s, the
LIHTC program had become well-established, and competition for tax credit allocations had become intense.
State agencies took advantage of this opportunity to raise the bar for tax credit applicants, requiring develop-
ments to provide greater levels of public benets to be competitive. Later projects often have multiple tiers of af-
fordability—for example, some units aordable for households at 30 percent or 40 percent of AMI, some at 50
percent AMI, and some at 60 percent AMI. With data collection on LIHTC projects placed in service in 2006,
HUD started to ask whether the elected rent/income ceiling for projects was 50 percent of AMI or 60 percent
of AMI, and whether any project units were set-aside at levels below the program election. For projects placed
in service in 2006 through 2007, more than two-thirds of projects placed in service had some units at a lower
rent tier, according to the HUD LIHTC database (Climaco et al., 2010).
38
In addition to having lower rents, these properties are more costly to administer because property managers
must work hard to identify and attract the households to whom apartments may be rented. Furthermore, many
states award extra points in the tax credit application process for projects serving special-needs populations—
homeless people or people with disabilities, for example. Properties serving special-needs populations often need
to create working partnerships with organizations that can deliver health and social services.
39
Lower rents from greater income “tiering,” coupled with higher costs for administering those complex income
tiers and for serving more needy resident populations, have lower net income projections and, therefore, can
support less mortgage debt. With higher development costs and lower rst mortgage debt, many later year
LIHTC properties raised soft debt to cover the funding gap. While relatively few of the early year LIHTC
developments had soft loan nancing, a great many projects in the more recent years of the program did. We do
not have this information for earlier years, but nearly 30 percent of all projects placed in service between 2003
and 2007 had HOME subsidies, and nearly 7 percent had Community Development Block Grants (Climaco et
al., 2010).
40
Others (not recorded in the database) have soft debt from state- or city-funded housing programs.
Brokers and industry observers speculate that later year LIHTC properties will prove more dicult than early
year properties to renance and move into the conventional real estate world—either with aordable rents or
with repositioned, higher rents. e upshot may be that a larger percentage of later year LIHTC properties end
up being recapitalized with additional allocations of 9-percent tax credits.
38. e database records one rent/income ceiling election for each project. If properties with multiple buildings may have dierent
rent/income ceiling elections, the maximum rent/income ceiling election is recorded.
39. ese services might include mental health counseling, family intervention, adult job training and/or employment placement, or
education services for children, with the specic services depending on the households that are targeted.
40. Data on the use of HOME and CDBG subsidies were rst collected by HUD in 2005 for projects placed in service in 2003.
LATER LIHTC PROPERTIES: WILL WE SEE THE SAME PATTERNS GOING FORWARD?
78
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
Properties with soft debt may be more dicult to nance with bonds and 4-percent tax credits, especially if the
property has lower rent tiers, nontraditional expenses, or both—and, therefore, not much cash ow for amortiz-
ing bond-nanced hard debt. ese properties may also be more likely than earlier year properties to encounter
exit tax issues when establishing a price for the sale the LPs’ interests. On the other hand, public funders may
be willing to provide additional subsidies for properties that serve households with special needs or in lower
income tiers. When permanent nancing includes substantial soft debt, the property can meet the 4-percent
tax credit test that 50 percent of the property’s nancing must be tax-exempt private activity bond debt through
bond-funded construction loans repaid in part by the soft debt.
A SOMEWHAT HIGHER PERCENTAGE OF LATER YEAR LIHTCS ARE IN LOW-POVERTY CENSUS TRACTS
e poverty rate of the location of a LIHTC property can serve as a rough proxy for locations that might have
the ability to charge rents greater than the LIHTC maximum and, therefore, as dened by this study, unaf-
fordable. e percentage of properties in census tracts with poverty rates of 10 percent or less rose from about
25 percent in 1987 through 1994 to about 30 percent in 1995 through 2009, and the percentage in the suburbs
rose as well (exhibit 7.1; McClure 2006). ese properties could be at risk of repositioning through the QC
process, as they are more likely to have rents that exceed the LIHTC maximum rents.
CONCLUSION
Overall, the later year LIHTC properties appear to be at even lower risk of being repositioned as market-rate
housing with unaordable rents than the early year LIHTCs. A key factor is the very existence of extended use
restrictions through Year 30, with the only possibility of relief a complicated QC process that some states have
required owners to waive, while others make it procedurally dicult to succeed. Another factor is the much
larger percentage of later LIHTC properties that have nonprot sponsors.
Osetting factors might be the lower share of later year properties with Section 515 loans and the lower share
with project-based rental assistance, as well as the higher share that are in high-value locations. Nearly one-third
of later year properties, however, do have project-based rental assistance contracts.
e more complex nancial and rent structures of later year LIHTCs also may militate against repositioning as
market-rate housing. However, those structures also may make it more dicult for later year LIHTC properties
to use simple, conventional renancing to “melt into” the mainstream of housing with aordable rents. More
likely, many of the later year properties will continue to be part of a self-conscious industry of aordable hous-
ing providers. Although the greater proportion of later year LIHTCs that were either newly built or substan-
tially renovated when placed in service may suggest a lower need for recapitalization at or around Year 15, both
ongoing and new owners of tax credit properties may try to use a second round of tax credits.
LATER LIHTC PROPERTIES: WILL WE SEE THE SAME PATTERNS GOING FORWARD? CONCLUSIONS: POLICY RECOMMENDATIONS AND SUGGESTIONS FOR FURTHER RESEARCH
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
8. CONCLUSIONS: POLICY
RECOMMENDATIONS AND
SUGGESTIONS FOR FURTHER RESEARCH
8.1 POLICY RECOMMENDATIONS FOR MAINTAINING
A STOCK OF AFFORDABLE RENTAL HOUSING
A key objective of rental housing subsidy programs, including the Low-Income Housing Tax Credit, is for
localities and housing markets across the nation to have a stock of housing that is aordable for low-income
renters and in reasonable physical condition. is study has conrmed that policies for the older LIHTC stock
will need to focus both on preserving aordability and on preserving physical quality. We have identied three
basic paths that older LIHTC properties take: (1) they are repositioned as higher rent or no longer rental, (2)
they are recapitalized with new public subsidy, or (3) they remain aordable even after their use restrictions ex-
pire. Based on observations made during this study, the third outcome has been the most common and would
continue to be the most common even if no public policy tools were available to aect what the outcomes are
for the older LIHTC housing stock. But policymakers and stakeholders do have tools, and their actions will af-
fect not only the magnitude of each set of outcomes, but also which properties follow which path. Policymakers
who aect the outcomes for this stock of housing comprise three groups:
• State housing finance agencies (HFAs). HFAs and associated state housing and community development
agencies
41
control most of the resources and other policy levers: they devise the Qualied Allocation Plans
(QAPs) and other rules and processes for awarding new 9-percent credits; they dene the rules and process-
es for Qualied Contract (QC) sales; they establish thresholds for bond nancing and 4-percent credits;
and they control other sources of soft debt such as state-funded programs and HOME. HFAs also have
ongoing relationships with housing developers who may want to do business with them in the future.
• The federal government—HUD, Treasury, and Congress. e federal government can change the
resources and policy levers available to HFAs. Congress can do so through new law, the Department of the
Treasury (Treasury) through interpretation of the tax code, and HUD through proposals to Congress and
Treasury. HUD also, through development of data on LIHTC and through research such as this study, can
provide information that helps other policymakers make decisions.
• Advocates, housing intermediaries, and mission-driven developers. ese organizations also make
choices that shape policies and outcomes for the LIHTC housing stock. ey inuence policy on the state
and federal levels and, in the case of developers, they make choices about where to focus their priorities:
maintaining what they own, acquiring and reinvigorating older properties, or developing new ones.
41. In some states the agency that allocates LIHTC is dierent from the agency that administers the HOME program and state-
funded housing subsidy programs.
CONCLUSIONS: POLICY RECOMMENDATIONS AND SUGGESTIONS FOR FURTHER RESEARCH
80
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
RECOMMENDATIONS FOR STATE HOUSING FINANCE AGENCIES
State HFAs will come under great pressure as the large stock of LIHTC housing ages. Most use restrictions will
not expire until 2022 or later, but the QC sale process will be open to owners before then. As LIHTC devel-
opments age, owners will seek new LIHTC allocations and other state-controlled resources for older LIHTC
properties to replace worn-out systems and nishes and, in some cases, to improve the appeal of their devel-
opments in the face of competition from other rental housing. State policymakers are going to have to make
choices—with nite resources, they will not be able to do everything. In view of the ndings of this study on
what happens to LIHTC properties in dierent market conditions, we recommend that those choices be made
on the basis of a set of guiding principles and on careful examination of the housing markets in which the older
LIHTC stock within their states operates. HFAs then should use their policy levers to carry out those principles
as they make choices about particular older LIHTC developments.
OLDER LIHTC PROPERTIES AT RISK OF BEING REPOSITIONED IN THE MARKET
HFAs should place the highest priority on the developments that are most likely to be repositioned in the mar-
ket—as higher rent housing or conversion to homeownership or another use. e starting point should be an
analysis of the older LIHTC housing stock in the state—probably focusing on properties that have been in service
for 15 years or more and are owned by for-prot entities—to create a priority list of properties that are in locations
where they already could charge substantially higher rents, if unrestricted. e list should also identify properties
in areas that are gentrifying and, therefore, are likely to be able to charge market-determined rents that are higher
than LIHTC rents, or are likely to be able to do so within a few years because substantial evidence indicates that
the area is gentrifying. e good news from this study is that this list is likely to constitute a minority of LIHTC
properties and units in most states. e bad news is that it is likely to take considerable resources to forestall the
conversion of the particular properties that are in valuable locations. Preserving these properties as aordable hous-
ing will almost always be less costly than investing in creating new aordable developments in neighborhoods that
are not otherwise likely to provide housing opportunities to modest income households. is investment may be
the most cost-eective way to encourage or maintain some amount of economic integration and diversity.
For properties that are nearing the end of the use restriction and have been identied as at high risk of conversion
away from aordable rental housing, the HFA could announce that it is prepared to make resources available to
a preservation purchaser or to a current owner willing to further extend the aordability period. ese resources
might include new allocations of 9-percent tax credits or soft debt from a state-controlled program, or both.
A property at risk of becoming unaordable might need renovation at the time a preservation sale or an agree-
ment by the current owner to extend use restrictions occurred, but might not. So, for these properties, the HFA
should not impose a minimum on the amount of rehabilitation done with a new allocation of LIHTC beyond
the federal minimum of $6,000 per unit. In addition, to make these preservation deals feasible, the HFA might
have to waive whatever standards it has established as maximum amount of tax credit per unit or per property.
Properties at risk of being repositioned with higher rents would be able to charge rents at the LIHTC maximum
if continued under use restrictions. erefore, especially in regions where the LIHTC maximum is relatively high,
the property might be able to support enough debt to be able to use bond nancing. So the HFA might decide
it was advantageous to encourage preservation purchasers to use bond nancing and 4-percent tax credits rather
than applying for 9-percent credits, along with soft debt provided by the HFA or other state agency as needed.
CONCLUSIONS: POLICY RECOMMENDATIONS AND SUGGESTIONS FOR FURTHER RESEARCH CONCLUSIONS: POLICY RECOMMENDATIONS AND SUGGESTIONS FOR FURTHER RESEARCH
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
OLDER PROPERTIES NOT AT RISK OF BEING REPOSITIONED IN THE MARKET
For properties not at risk of becoming unaordable because they are not in locations where LIHTC rents are
substantially below market rents, HFAs will have to decide how to identify those properties for which it is both
necessary and important to provide resources for recapitalization from a xed pot of housing subsidy resources.
Establishing some principles is important for being able to say no to the owners of other properties. As long as
bond nancing and the 4-percent LIHTC equity that accompanies it is, in reality, not a nite resource—because
demand does not exhaust the state’s private activity bond ceiling—HFAs should not place barriers in the way of
LIHTC owners using that resource by itself to meet their recapitalization needs. But the HFA (and its sister agen-
cies) should not agree to use nite resources such as allocations of 9-percent credits, state housing trust funds, or
HOME dollars unless a property meets a further test that makes it a high priority for physical preservation. Only
then should the state choose that property over the development of additional aordable housing.
We suggest the following categories of properties that should have high priority for investment in meeting their
capital needs, despite their not being in locations where market rents already are higher than LIHTC rents or
are likely to become so soon.
• Properties that serve a special-needs population should get high priority. Supportive housing for people
with disabilities, including permanent supportive housing for formerly homeless people, is an obvious
example. Supportive housing for seniors is another example, but housing that serves elders who do not need
special services probably is not, as most housing markets have a good supply of housing units of a size suit-
able for individuals or couples at rents around the LIHTC standard.
• Properties that have committed—or are willing to commit—to rent tranches of units below the LIHTC
maximum may be deserving of high priority. However, the HFA, when underwriting such projects, should
scrutinize project feasibility carefully. LIHTC operators often have found it dicult to manage turnover
and waiting lists to ll units within the tranches. If the state-controlled resource that could support recapi-
talization of these properties may be used instead for tenant-based assistance—as the HOME program and
some state-funded housing programs can be—it probably makes more sense to meet the needs of house-
holds who cannot aord rents near the LIHTC maximum rents by making vouchers available to renters
with incomes well below 60 percent of AMI.
• Properties that are in a neighborhood where a concerted neighborhood transformation eort is going on
might get priority, but only if the older LIHTC property is in such bad physical condition—or is so badly
managed—that a preservation program is needed to prevent it from blighting the neighborhood. Other-
wise, any use of state housing development resources should be for additional housing—homeownership or
rental—that could have a substantial positive impact on the neighborhood, rather than the marginal im-
pact of xing up a property that already is in reasonable condition. Furthermore, the bar should be set high
for what qualies as a concerted neighborhood transformation eort. Proposal rhetoric is not enough. e
sponsor should be able to demonstrate that substantial public resources have been committed to a multi-
faceted revitalization eort in order to persuade the HFA that investment in old (or new) LIHTC develop-
ments is a priority use of resources.
Without such a concentrated neighborhood revitalization eort, the HFA’s policy should be to avoid weaken-
ing fragile neighborhoods further by creating a surplus of low-rent properties that compete with each other
for a limited base of tenants. e HFA might make an exception and agree to allocate new resources in those
CONCLUSIONS: POLICY RECOMMENDATIONS AND SUGGESTIONS FOR FURTHER RESEARCH
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
rare cases where properties placed in service under LIHTC are damaged by natural disasters or fail because of
unforeseen defects in construction.
e overall principal should be that state housing resources are nite. A property’s previous use of LIHTC (or
LIHTC and other state-controlled subsidies) is not a sucient reason for choosing to subsidize that property a
second time, unless the property is at real risk of becoming unaordable or serves a special-needs population or
has another compelling function.
Instead, state decisionmakers should recognize that most older LIHTC properties will, over time, become
mid-market rental properties indistinguishable for other mid-market rental housing, and that this is a good
result. ese properties will develop capital needs—all properties do. But it is not within the resources of HFAs
to keep all mid-market rental housing in like-new physical condition. Instead, state policies should welcome
and encourage older LIHTC properties to meet their capital needs in the same way that other rental housing
does—through a combination of reserves and periodic renancing. In some cases, the state agency may choose
to resubordinate existing soft debt to facilitate this process.
42
For properties states can identify as not at risk of becoming unaordable but that are struggling to nd income-
qualifying tenants, HFAs should not place barriers in the way of requests for QC sales that result in older
LIHTC properties having their extended 30-year use restrictions lifted. Instead, HFAs should be willing to
lift use restrictions for such properties through the QC sales process as a way of broadening the market for the
properties enough to make them self-supporting. As noted in this report, some midwestern HFAs have already
begun doing this.
NEW LIHTC PROPERTIES
Given that some older LIHTC properties, albeit a minority, are at risk of being repositioned as unaordable
at the end of 30-year use restrictions and that considerable expenditures of resources will be needed to prevent
that from happening, should HFAs extend use restrictions beyond 30 years for which allocations are made in
the coming years? We do not recommend this, for the following reasons.
Extended use restrictions come at a cost. is is inherent in the design of the LIHTC program, in which the
tax credit compensates investors for reduced expectations of cash ow and resale potential. e longer the use
restrictions last, the higher the initial public subsidy needs to be.
As this study has shown, under some market conditions, inexible use restrictions may undermine the goal of
preserving aordable housing in good condition by overly restricting the rental market for those properties. For
example, we learned that in some midwestern states, many LIHTC properties are very similar to market-rate
properties but use restrictions constrict the market for those properties just enough that they are at risk of fail-
ing physically and nancially. e Ohio HFA has been willing to remove use restrictions for properties that will
still provide good quality housing at modest rents.
Periodic reassessments of the relative importance of a particular property for expanding the opportunities for
low-income renters to live in good quality, aordable housing are valuable. Such reassessments are triggered by
the impending end of use restrictions and may not happen otherwise. Locking properties into very long-term
42. Whether resubordinating soft debt at the time of renancing constitutes subsidizing the property a second time depends on
whether a real expectation exists that the soft debt would be repaid.
CONCLUSIONS: POLICY RECOMMENDATIONS AND SUGGESTIONS FOR FURTHER RESEARCH CONCLUSIONS: POLICY RECOMMENDATIONS AND SUGGESTIONS FOR FURTHER RESEARCH
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
use restrictions may place de facto obligations on public funders to continue to make investments in those
properties, even if other properties with other locations and physical characteristics would be better places for
low-income renters to live. e history of the public housing program is instructive.
RECOMMENDATIONS FOR THE FEDERAL GOVERNMENT
Federal government support for the LIHTC program has shown great resilience in the face of budget pressures,
and we assume that it will continue to do so. At the same time, policies for the use of this resource need not be
set in stone, and some were changed as recently as the changes made by the Housing and Economic Recovery
Act in 2008. e 2013 federal budget includes some further proposals for changes to the LIHTC program.
Just as we have recommended some principles for states to follow in making choices about using their resources
to preserve older, aordable housing, we suggest that federal policymakers take actions that will create a high
priority for preserving those older LIHTC properties that are at greatest risk of no longer being aordable, as
well as those that serve a special-needs population. Our recommendations for federal policy relate to QAPs, to
the allocation of LIHTC authority to the states, and to the development of databases and analytical tools for
states to use in making implementing their LIHTC programs and for advocates, intermediaries and mission-
driven developers to use in carrying out their roles.
QUALIFIED ALLOCATION PLANS
Section 42 of the Internal Revenue Code sets the framework within which states draw up their QAPs for
awarding 9-percent tax credits. e preferences and selection criteria included in the law are not exclusive and
leave HFAs with broad leeway to add other criteria and to create scoring systems that emphasize some crite-
ria more than others. Notably absent from the federal QAP standards is whether the project is in a location where
market rents are higher than rents at the LIHTC standard. e selection criteria listed in the statute include
location, but without further explanation of what features of the location are important. Similarly, the prefer-
ences include “projects which are located in qualied census tracts…and the development of which contributes
to a concerted community revitalization plan,” but without further describing such a plan (IRC §42(m)(1)(C)
(v)). e selection criteria also include tenant populations with special housing needs. e time may be ripe for
federal agencies to propose—and Congress to enact—a revamped version of the QAP standards that sets the
framework for when allocations of 9-percent LIHTC credits should be made to older LIHTC developments,
those that have previously been placed in service under the tax credit. Alternatively, the Treasury (with advice
from HUD) might issue guidance on QAPs that elaborates on the current statutory language to dene loca-
tion as a place where market rents are not aordable judged by the LIHTC standard, “concerted community
revitalization plan” (IRC §42(m)(1)(B)(ii)(III)) as a commitment of substantial resources in such areas as school
improvement, access to health services, access to job training and employment, and substantial physical rede-
velopment (such as investment in upgrading existing deteriorated housing or commercial properties or creating
new housing), and “tenant populations with special housing needs” (IRC §42(m)(1)(C)(v)) as those who need
health or other social services to maintain their tenancies.
CONCLUSIONS: POLICY RECOMMENDATIONS AND SUGGESTIONS FOR FURTHER RESEARCH
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
ALLOCATION OF LIHTC AUTHORITY TO THE STATES
LIHTC developments likely to be repositioned in a way that makes them unaordable are not evenly distrib-
uted across the United States in proportion to population. Instead, they are most likely to be in states with high
housing costs and limited housing supply. e need for preventing LIHTC properties from becoming unaf-
fordable is strongest in those states—as, for that matter, is the need for producing additional units of LIHTC-
supported, aordable rental housing. e concept that LIHTC should be allocated on the basis of a measure
of housing need, rather than per capita, is not new (Nelson, 1999, Nelson, 2002). However, the risk that large
number of units in older LIHTC developments will become unaordable when 30-year use restrictions expire,
and the need to enable HFAs to act proactively to preserve them, means that the time may have come to make
the change to a needs-based allocation formula. For example, a formula could allocate more LIHTC author-
ity to states that have a relatively high level of mismatch between the number of renters with income below the
LIHTC standard and the number of rental units aordable to households at or below that income level. Khad-
duri et al., (2004) provide a specic proposal for an allocation formula that includes this as well as other factors.
e formula might also take into account dierences in development costs in dierent parts of the country.
e basis boost permitted for properties in Dicult Development Areas was intended to recognize dierences
in development costs that are not matched by dierences in rent potential. Basis boosts, however, are made by
HFAs out of the xed, per capita amount of LIHTC allocated to the state.
A disadvantage of this proposed change is that moving away from a per capita allocation formula could weaken
support for LIHTC from representatives of states that would lose LIHTC resources in a reallocation of a xed
national amount of LIHTC authority. On the other hand, developers and owners of private-market rental hous-
ing in those same states—where most LIHTC property competes directly with other rental housing—might
be in favor of such a change. An alternative to a new formula for allocating 9-percent LIHTC credits would be
to enact a modest pool of bonus LIHTC funding to be used by the Treasury to reimburse states that allocate
tax credits to carefully dened at-risk properties. Yet another possibility is to permit basis boosts to the same,
narrowly dened properties when they use bond nancing and 4-percent credits. is is eectively a more
narrowly targeted variation of a proposal in the 2013 budget intended to bring more resources into the LIHTC
program by permitting basis boosts with 4-percent credits.
DATABASES AND ANALYTICAL TOOLS
HUD does a lot and could do more to create and maintain data and analytical tools that support decisionmak-
ing at all levels around the LIHTC program. HUD has created and updates every year the LIHTC database
on the characteristics of properties placed in service each year, one of the sources of information used for this
study. at database has already been enhanced by additional questions on the type of nancing used for proj-
ects placed in service in recent years. e database soon will be greatly enhanced by the addition of data on the
demographic and income characteristics of the households that occupy LIHTC properties, on the rents actually
paid for LIHTC units (which may be below the maximum rents permitted), and on whether the unit or the
household also has a Housing Choice Voucher (HCV), Section 8, or other subsidy that permits the occupant
to pay a much lower rent. HUD should certainly continue the basic eort and should make the enhanced data
publicly available as soon as is possible and with whatever detail about unit occupancy and rents is consistent
with privacy protections.
CONCLUSIONS: POLICY RECOMMENDATIONS AND SUGGESTIONS FOR FURTHER RESEARCH CONCLUSIONS: POLICY RECOMMENDATIONS AND SUGGESTIONS FOR FURTHER RESEARCH
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
e 2-year time lag between HFA allocations of LIHTC and the date when properties are placed in service, to-
gether with the further time lag needed for receiving data for the past year from the HFAs and assembling it for
publication, limits the usefulness of the HUD LIHTC database for monitoring recent changes in state policies
and the evolution of the LIHTC program. HUD might consider collecting from HFAs, a separate set of data,
information on each year’s LIHTC awards, with a smaller number of property characteristics, not including
those most likely to change before the property is placed in service. It might be possible for HUD to build on
the annual survey of HFAs carried out by the National Council of State Housing Agencies that already collects
some of this information. e LIHTC allocation data would include key indicators such as the street addresses
where the developments will be located, the estimated number of units in the property, and whether the prop-
erty is intended for a target population group.
In addition to this continued data development, HUD also could create analytical tools to help HFAs make
the lists that we have recommended of properties most at risk of being repositioned as unaordable housing. In
particular, HUD could develop a methodology for states to use to identify housing markets and sub-markets
where rents are greater than the LIHTC maximum or where neighborhood characteristics suggest that the
neighborhood is on an upward trajectory.
43
HUD could make the methodology available to states and, possibly,
also publish a list of such places.
RECOMMENDATIONS FOR ADVOCATES, INTERMEDIARIES, AND MISSION-DRIVEN DEVELOPERS
Advocates and housing intermediaries play a vital role both in recommending policy changes to HFAs and the
federal government and in the implementation of policies as they aect individual properties. Given the nd-
ings of this study, we recommend these organizations support HFA eorts to identify those older LIHTC prop-
erties most at risk of becoming unaordable. In some states, the HFA might ask advocates or intermediaries to
take the lead in the analysis that creates and maintains a priority list of properties. Mission-driven developers,
in turn, are the organizations to which HFAs will frequently need to turn to purchase older LIHTC proper-
ties in high-value locations and to operate the housing under use restrictions that keep it aordable. Leaders of
those development entities should be engaging in strategic planning that positions their organizations to assume
those responsibilities. is may mean being less reactive and more strategic about opportunities that come their
way to develop and redevelop housing and declining opportunities to acquire properties that do not expand the
range of locations in which low-income renters are able to live.
8.2 RECOMMENDATIONS FOR FUTURE RESEARCH
As suggested by the policy recommendations that ow from this study, understanding the role that LIHTC
housing plays in housing markets and what it accomplishes for its residents are essential for making policy
about the future of the older LIHTC housing stock. erefore, one of our recommendations is for research that
focuses on the role of LIHTC in creating mixed-income housing, both by making housing available to low-
income renters in locations where it otherwise would not be and by creating housing that has a mixed-income
character within the development itself. Some of the specic questions that this research would address are—
43. In addition to continuing in its general capacity of analyzing housing market data, HUD’s Oce of Policy Development and Research
is in the process of developing a Neighborhood Opportunity Database that could be useful in identifying gentrifying locations.
CONCLUSIONS: POLICY RECOMMENDATIONS AND SUGGESTIONS FOR FURTHER RESEARCH
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
• Besides average market rents, what identies a location in which low-income renters would not be able to
live without housing with use restrictions such as LIHTC?
• To what extent and in what sense do properties that contain both LIHTC and non-LIHTC units create op-
portunities for low-income families to live in mixed-income settings? Are these properties nancially viable,
and what are the challenges to operating them successfully?
• To what extent and in what sense do LIHTC properties that have income tiers with the maximum LIHTC
rent limits create opportunities for low-income families to live in mixed-income settings? Are these proper-
ties nancially viable, and what are the changes to operating them successfully?
• To what extent and in what sense do LIHTC properties in which families use HCVs create opportunities
for low-income families to live in mixed-income settings? Are some of these properties becoming concentra-
tions of poor families rather than mixed-income communities? If so, what leads to that result?
• Do LIHTC properties that no longer are subject to the program’s use restrictions provide opportunities for
mixed-income housing? To what extent does this depend on the availability of HCVs? What role do former
LIHTC developments that also formerly had project-based Section 8 play in the housing market?
• What types of households (by income, race and ethnicity, and household type) live in dierent types of
LIHTC developments (by location, property type, property ownership, etc.)? How are LIHTC properties
marketed, and how do prospective tenants nd out about them?
Another recommendation is for research to understand better the role that adding new units of subsidized
rental housing such as LIHTC plays in transforming—or weakening—a neighborhood. HUD is undertaking
an evaluation of Choice Neighborhoods that will document neighborhood change in a few places where the
eort to change a neighborhood brings together concentrated resources across housing and other sectors. Other
research has focused on New York City’s massive investments in housing in the 1980s and 1990s. A broader
research program should focus on other cities and on a broader range of neighborhoods. Some of the questions
that this research would address are—
• How much new or substantially rehabilitated housing is needed to change the trajectory of a neighborhood?
• What combinations of rental and homeownership housing are most successful in changing a neighbor-
hood? Of subsidized and market-rate rental housing?
• Which other investments or policy transformations are critical to neighborhood revitalization? Are neigh-
borhood-focused employment eorts essential, or are transportation links to employment sucient? How
important is investment in school quality to attracting and retaining residents?
• What can we learn from revisiting investments in neighborhoods associated with the HOPE VI program?
• What can we learn from the housing recession about the role of rental housing in neighborhood dynamics?
Yet another area of research suggested by this study has to do with denitions and nancing mechanisms for
special-needs housing supported by LIHTC. For example, some of the research questions are—
• When should subsidized housing for seniors be dened as special-needs housing? At what level of linked
services is this housing that low-income seniors would not otherwise be able to access?
CONCLUSIONS: POLICY RECOMMENDATIONS AND SUGGESTIONS FOR FURTHER RESEARCH CONCLUSIONS: POLICY RECOMMENDATIONS AND SUGGESTIONS FOR FURTHER RESEARCH
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
• What models for supportive housing best link health programs to subsidized rental housing such as LIHTC
developments? How can HFAs and state health agencies best coordinate their eorts? What level of commit-
ment of services from the health system should HFAs seek in selecting LIHTC special-needs developments?
• How do LIHTC-funded developments that include both supportive housing units and units for general oc-
cupancy work? How many supportive housing units are needed to make service linkages feasible? Do such
developments face underwriting challenges?
A nal set of issues is suggested by our observation that HFAs and other policymakers will have to make deci-
sions about the LIHTC stock within constrained resources. HUD-sponsored research on the development and
operating costs of LIHTC housing and how they vary around the country could be very useful for informing
HFA policy standards, as well as for allocating tax credits and underwriting specic properties. As described in
chapter 1.1, the few studies that carefully compare the costs of LIHTC with other federal housing subsidies are
limited by their inability to fully account for the costs of LIHTC development and operations.
For example, such research might examine—
• Development costs of LIHTC properties and how they vary by property characteristics such as oor space,
amenities, design, and nish materials, as well as community space to meet the needs of special populations.
• Operating costs of LIHTC properties and how they compare with the operating costs of other aordable
housing. is includes factors that aect operating costs such as where the property is in the compliance
period and what type of population it serves.
Life-cycle costs of LIHTC properties and how that is aected by the timing of renancing and recapitaliza-
tion. is includes the life-cycle cost tradeos of front-end investments in energy-saving features such as highly
insulated walls and windows and solar panels.
e Low-Income Housing Tax Credit is a major source of new production of multifamily rental housing, ac-
counting for one-third of all new units in recent years. An often-mentioned strength of the program is that it
is a front-end subsidy, placing no ongoing obligation on the federal government or state governments to pro-
vide operating support for the housing over time. As this study has shown, the role of the housing placed in
service under LIHTC in local housing markets is diverse. State, federal, and private policymakers should keep
that diversity in mind when making decisions about whether the older LIHTC stock should receive additional
public subsidy with new, extended use restrictions or should be permitted—and encouraged—to blend into the
broader stock of moderately priced private rental housing.
CONCLUSIONS: POLICY RECOMMENDATIONS AND SUGGESTIONS FOR FURTHER RESEARCH
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
SYNDICATORS, BROKERS, AND LIHTC INDUSTRY EXPERTS INTERVIEWED FOR THE STUDY
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
SYNDICATORS, BROKERS, AND LIHTC INDUSTRY
EXPERTS INTERVIEWED FOR THE STUDY
e following tax credit syndicator and broker rms and organizations participated in the study by agreeing to
be interviewed for this research eort. Organizations marked with an asterisk (*) allowed project sta to meet
with them to complete more in-depth interviews.
Aegon USA
Apartment Realty Advisors
Bank of America
Boston Capital*
Boston Financial Investment Management*
CB Richard Ellis
Centerline*
Enterprise Community Investment, Inc.
Fannie Mae
JP Morgan Capital Corporation
Marcus & Millichap*
National Equity Fund
Raymond James Financial
Richman Capital
SYNDICATORS, BROKERS, AND LIHTC INDUSTRY EXPERTS INTERVIEWED FOR THE STUDY
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
e following tax credit syndicators, brokers, state allocating agency sta, and other industry experts helped
this research eort by agreeing to be interviewed for the study. Interviews completed for the owner survey are
not included in this list.
Katherine (Katie) M. Alitz
Boston Capital
Dorothy Anderson
North Dakota Housing Finance Agency
Randy Archuleta
Arizona Department of Housing
Charles (CJ) Baier
Raymond James Financial
Raymond James Tax Credit Funds, Inc.
Eric Barteldes
Federal National Mortgage Association
Timothy Bartlett
Boston Capital
Regina Bender
Bank of America
Georgette Benson
District of Columbia Department of Housing
and Community Development
Michael Bodaken
National Housing Trust
Cassandra Brown
Michigan State Housing Development Authority
Judy Brummett
Arkansas Development Finance Authority
Sylvia Burgess
North Dakota Housing Finance Agency
Joseph Callender
Ernst & Young, LLP
Brian Carnahan
Ohio Housing Finance Agency
Brenda Champy
Boston Capital
Robert Collier
Mississippi Home Corporation
Christopher Collins
First Atlantic Capital, LLC
Herbert Collins
First Atlantic Capital, LLC
Marianne Cortland
Boston Capital
Kevin Day
Centerline
Dan DeLong
Illinois Housing Development Authority
Renee Dickinson
Minnesota Housing Finance Agency
Matt Dillis
Boston Capital
Rose Eaton
National Equity Fund
SYNDICATORS, BROKERS, AND LIHTC INDUSTRY EXPERTS INTERVIEWED FOR THE STUDY SYNDICATORS, BROKERS, AND LIHTC INDUSTRY EXPERTS INTERVIEWED FOR THE STUDY
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
Cindy Fang
Ernst & Young, LLP
omas G. Fischer
CB Richard Ellis, National Tax Credit
Advisory Group
Gerald (Jerry) Flemming
National Equity Fund
Tim Flint
Marcus & Millichap
David M. Fournier
Apartment Realty Advisors, National Aordable
Housing Group
James A. Fox
Housing Investments
JP Morgan Capital Corporation
Anthony Freedman
Holland and Knight
Noah Freiberg
New Jersey Housing and Mortgage Finance Agency
Michael Gladstone
Boston Financial Investment Management
Dmitri Gourkine
Marcus & Millichap
Greg Griffin
Enterprise Community Investment, Inc.
Brandon Grisham
Marcus & Millichap
Ethan Handelman
National Housing Conference
William Haynsworth
Boston Financial Investment Management
Ben Henderson
Aegon USA
Jack Hodgkins
Community Investments and Lending Group
Wells Fargo
Jocelyn Iwamasa
Hawaii Housing Finance and
Development Corporation
Teresa Kile
Nebraska Investment Finance Authority
Korey Kopp
Wisconsin Housing and Economic
Development Authority
Mark Koppelkam
New Hampshire Housing Finance Authority
Peter Lawrence
Enterprise Community Investment, Inc.
alia Lee
Arkansas Development Finance Authority
SYNDICATORS, BROKERS, AND LIHTC INDUSTRY EXPERTS INTERVIEWED FOR THE STUDY
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
Teri Mamaril
Mississippi Home Corporation
Sandra McGougan
Oklahoma Housing Finance Agency
Dan Mendelson
Chesapeake Community Advisors, Inc.
Brian Myers
Richman Capital
Peter A. Nichol
e Reliant Group
Vincent O’Donnell
Local Initiatives Support Corporation
Beth O’Leary
Enterprise Community Investment, Inc.
David Player
Fannie Mae
Jeffrey Rahn
Boston Financial Investment Management
Michael Regan
Boston Capital
Will Renner
Boston Financial Investment Management
David Reznick
e Reznick Group
Mark Romick
Alaska Housing Finance Corporation
Judy Schneider
National Equity Fund
Robert Sheppard
Marcus & Millichap
Ammer Singh
California Tax Credit Allocation Committee
David Smith
Recap Advisors
Bettie Teasley Sulmers
Tennessee Housing Development Agency
Marianne Votta
Bank of America
Walter Williams
Boston Capital
SYNDICATORS, BROKERS, AND LIHTC INDUSTRY EXPERTS INTERVIEWED FOR THE STUDY
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
APPENDIX A. HUD NATIONAL LIHTC
DATABASE: CURRENT PROJECT DATA
COLLECTION FORM
HUD LIHTC DATABASE DATA COLLECTION FORM OMB APPROVAL NO. 2528-0165 (EXP. 05/31/2013)
State: Allocating Agency Name:
Project Identifying Number (if any):
Project Name:
Project Address:
(NUMBER) (STREET)
(CITY) (STATE) (ZIP)
Building Identication Numbers (BIN #): (ST-YR-XXXXX)
Building Address:
(STREET) (CITY) (ZIP)
(STREET) (CITY) (ZIP)
Owner/Owner’s
Representative:
(FIRST NAME) (LAST NAME)
(COMPANY NAME)
(NUMBER) (STREET)
(CITY) (STATE) (ZIP)
(AREA CODE AND TELEPHONE NUMBER)
Annual Amount of Tax Credits Allocated: $
Number of Total Units:
Number of Total Units by Size: =
OBR 1BR 2BR 3BR 4+BR TOTAL
Number of Low-Income Units:
What is the elected rent/income ceiling for Low-Income Units in this Project? 50% AMGI 60% AMGI
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT PAGE 1 OF 4 HUD LIHTC DATABASE DATA COLLECTION FORM
PREVIOUS EDITIONS UNUSABLE REVISED MAY 2010
APPENDIX A
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
HUD LIHTC DATABASE DATA COLLECTION FORM OMB APPROVAL NO. 2528-0165 (EXP. 05/31/2013
Are any units set aside to have rents below the elected rent/income ceiling? Yes No
If “Yes,” how many units?
Year Placed In Service:
Year Project Received Allocation or Bond Issued:
Ty p e (check all that apply):
New Construction Rehab (with or without acquisition)
Credit Percentage (check one):
9% (70% present value) 4% (30% present value) Both
Does this LIHTC project: Yes No If Yes, please provide:
Have a non-prot sponsor?
Have increased basis due to qualied
census tract/dicult development
area or HERA-based designation?
Have tax-exempt bond nancing?
Have a Rural Housing Service
(FmHA) Section 514 loan? RD Loan #:
Have a Rural Housing Service
(FmHA) Section 515 loan? RD Loan #:
Have a Rural Housing Service
(FmHA) Section 538 loan? RD Loan #:
Have HOME Investment Partnership
Program (HOME) funds? IDIS Activity ID: Amount:
Have Community Development
Block Grant (CDBG) funds? IDIS Activity ID: Amount:
Have an FHA/Risk Sharing loan? Loan #:
Form part of a HOPE VI development? Amount:
Target a specic population? (If yes, check all that apply)
Families Elderly Disabled Homeless Other
Have a federal or state project-based rental assistance contract?
Federal State Neither
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT PAGE 2 OF 4 HUD LIHTC DATABASE DATA COLLECTION FORM
PREVIOUS EDITIONS UNUSABLE REVISED MAY 2010
APPENDIX A APPENDIX A
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HUD LIHTC DATABASE DATA COLLECTION FORM OMB APPROVAL NO. 2528-0165 (EXP. 05/31/2013
INSTRUCTIONS
State: Enter the Postal Service two-character abbreviation for your state.
Project Identifying Number: Enter the Project Identication Number. If there is not an established method of assigning PINs, HUD
recommends using the following format: State Postal Abbreviation - Allocation Year – First two digits of BIN; e.g. CT-10-01.
Project Name: Enter the name of the project. Do not enter a partnership name (e.g., Venture Limited II).
Project Address: Enter the complete address of the property, including address number and street name, city, state, and ZIP Code.
If the project has multiple addresses (e.g., 52-58 Garden Street), please provide the address range. Also, please provide the address for
each building (BIN). Do not enter a P.O. Box.
Building Identification Number and Address: Enter the Building Identication Number (BIN) assigned to the building (from IRS
Form 8609). According to IRS Notice 88-91, the BIN consists of a two-character state postal abbreviation followed by the two-digit
designation representing the allocation year, and a ve-digit numbering designation. For example, the identication number for one
of 25 buildings allocated a credit in 2010 by the Connecticut Housing Finance Authority (the only housing credit allocating agency in
the state) might read CT-10-01001 .
Owner’s Contact Name, Address and Phone Number: Enter the name, address and phone number of the owner or owner’s contact
person. is will often be a representative of the general partner. is information will be used for future mail or telephone contacts
regarding the development. As such, we need an individual and company name and address as opposed to the partnership name.
Annual Amount of Tax Credits Allocated: Enter the total dollar amount of federal tax credits that may be claimed each year by the
owners of this project.
Number of Total Units: Enter the total number of units in the project, summing across buildings if needed.
Number of Total Units by Size: Enter the number of units in the project (summing across buildings if necessary) that have 0, 1, 2, 3,
or 4 or more bedrooms. Make sure the units sum to the total number of units in project.
Number of Low-Income Units: Enter the number of units the in project (summing across buildings if necessary) that were qualied
to receive Low-Income Housing Tax Credits when the building(s) was/were placed in service.
Elected Rent/Income Ceiling: Indicate whether the project qualies for tax credits with units set aside for tenants with income less
than or equal to 50% of Area Median Gross Income (AMGI) or 60% of AMGI. “1” =50% or ”2”=“60%
Units Below Elected Rent/Income Ceiling: Check yes if any units in the project have rent levels set below the elected maximum. If
yes, enter the number of units which meet this criteria. “1” =yes; “2”=no
Year Placed in Service: Enter the year the project was placed in service. If this is a multiple building project, with more than one
placed in service date, enter the most recent date. Placement in service date is available from IRS Form 8609, Item 5.
Year Project Received Allocation or Bond Issued: Enter the initial allocation year for which tax credits were awarded for the project. Alloca-
tion date is available from IRS Form 8609, Item 1a. If the project received multiple allocations, use earliest allocation year. If no allocation
was required (i.e., 50 percent or greater tax-exempt bond nanced) and IRS Form 8609 Item 1a is blank, enter the year the bond was issued.
Type (New Construction or Acquisition/Rehab): Enter the production type for which the project is receiving tax credits, i.e., a newly
constructed project and/or one involving rehabilitation. If the project involves both New Construction and Rehab, check both boxes. (Con-
struction type can be inferred from IRS Form 8609, Item 6. If box a or b is checked, the building is new construction. If box c and d or e is
checked, the building is acquisition/rehab.) “1”=New Construction; “2”=Acquisition and Rehab; “3”=Both New Construction and A/R
Credit Percentage: Indicate the type of credit provided: 9% credit (70% present value) or 4% (30% present value). Maximum ap-
plicable credit percentage allowable is available from IRS Form 8609, Item 2. e entry on the 8609 is an exact percentage for the
project and may include several decimal places (e.g., 8.89% or 4.2%). Please check the closest percentage -- either 9 or 4 percent. e
box marked “Both” may be checked for where acquisition is covered at 4% and rehab at 9%. “1”= 4% credit (30% present value); “2”=
9% credit (70% present value); “3”=both
Non-profit sponsor? Check yes if the project sponsor is a 501(c)(3) nonprot entity. Use the same criteria for determining projects to
be included in the 10 percent non-prot set aside. “1”=yes; “2”=no
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT PAGE 3 OF 4 HUD LIHTC DATABASE DATA COLLECTION FORM
PREVIOUS EDITIONS UNUSABLE REVISED MAY 2010
APPENDIX A
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
HUD LIHTC DATABASE DATA COLLECTION FORM OMB APPROVAL NO. 2528-0165 (EXP. 05/31/2013
Increased Basis Due to Qualified Census Tract (QCT) or Difficult Development Area (DDA)? Check yes if the project actually
received an increase in the eligible basis due to its location in a QCT, DDA, or HERA-authorized DDA designation. Increased basis
can be determined from IRS Form 8609, Item 3b. (Note: Projects may be located in a QCT or DDA without receiving the increase.)
“1”=yes; “2”=no
Tax-exempt bond financing? Check yes if nancing was provided through tax-exempt bonds. Use of tax-exempt bonds can be deter-
mined from IRS Form 8609, Item 4, which shows percentage of basis nanced from this source. “1”=yes; “2”=no
Rural Housing Service (RHS) Section 514 loans? Check yes if the project was nanced with a Rural Housing Service Section 514
direct loan, and provide the loan number. “1”=yes; “2”=no
Rural Housing Service (RHS) Section 515 loans? Check yes if the project was nanced with a Rural Housing Service Section 515
direct loan, and provide the loan number. “1”=yes; “2”=no
Rural Housing Service (RHS) Section 538 loans? Check yes if the project was nanced with a Rural Housing Service Section 538
loan guarantee, and provide the loan number. “1”=yes; “2”=no
HOME or CDBG funds? Check yes if the project was developed using HOME or CDBG funds, and provide the IDIS Activity ID
number and the dollar amount of funds. “1”=yes; “2”=no
FHA/Risk Sharing loan? Check yes if the project has an FHA /HUD Risk Sharing loan, and provide the loan number. “1”=yes;
“2”=no
Part of a HOPE VI development? Check yes if the project is part of a HOPE VI public housing revitalization eort, and provide the
dollar amount of HOPE VI funds related to development or building costs only. “1”=yes; “2”=no
Population targeting? Check yes if the project targets a specic population, such as families, elderly, people with disabilities, home-
less, or other. “1”=yes; “0”=no or not indicated
Federal or state project-based rental assistance contract? Check if the project has a signed contract for federal or state project-based
rental assistance, subsidizing rent for low-income tenants. “1”=Federal; “2”=State; “3”=neither
PUBLIC BURDEN STATEMENT
Public reporting burden for this collection of information is estimated to average 1 hour for each response. is includes the time for
collecting, reviewing, and reporting the data. e information will be used to measure the number of units of housing nanced with
the Low-Income Housing Tax Credit (LIHTC) that are produced each year. e information will also be used to analyze the charac-
teristics of these housing units, and will be released to the public. is agency (HUD) may not collect this information, and you are
not required to complete this form unless it displays a currently valid OMB control number.
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT PAGE 4 OF 4 HUD LIHTC DATABASE DATA COLLECTION FORM
PREVIOUS EDITIONS UNUSABLE REVISED MAY 2010
APPENDIX A APPENDIX B
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
APPENDIX B. SYNDICATOR AND BROKER
INTERVIEW GUIDES
SYNDICATOR INTERVIEW GUIDES
LIHTC YEAR 15 STUDY SYNDICATOR INTERVIEWS (REVISED JANUARY 22, 2010)
INITIAL EXPLORATORY CALLS (APPROXIMATELY 2–3)
1. Explain the study briey.
2. How would you describe your portfolio of early LIHTC (pre-1994) properties
a. Did it include many Farmer’s Home projects?
b. Did it include many projects with project-based Section 8s?
3. Were most of your early TC investments done as public oerings to individuals or private oerings to insti-
tutional investors? If this changed over time, when did that occur and why?
4. Were many of your earliest properties (pre-1990) subject to extended aordability restrictions beyond 15
years? Do you know what were the primary sources of these restrictions: other nancing (Farmer’s Home,
HOME, etc)? State agencies distributing the tax credits? Other sources (local land use restrictions, etc?)
5. Do you have a database that includes information about what has happened to your LIHTC properties that
have reached Year 15? at is, whether there has been a disposition, and if so, what was the nature of the
disposition? (GP purchase versus third-party sale, for example)
a. If you have such a database would you be willing to share it, condentially, with the study?
b. Would this data include information on other major types of nancing that the LIHTC projects had
initially (e.g., Farmers Home, FHA, project based Section 8, etc?)
c. What other kind of information might be available in your database of post-Year-15 properties? Does
it include information on property size, unit conguration, special populations served in the original
project, property condition on disposition, etc?
6. Do you aggressively pursue Year 15 property dispositions? Do you usually initiate the process, or does the
general partner? Do you begin planning for this in earlier years, e.g., years 13 or 14?
a. If you work actively to initiate property dispositions, why do you do this? E.g., to end reporting
requirements and administrative burden?
APPENDIX B
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
7. Do you have a general set of goals or exit strategy when the initial limited partnerships end? For example,
is your objective to end them as simply and quickly as possible? Minimize exit taxes for LPs? Maximize
residual value and nancial return? Manage a transition to new ownership? Or see whether your rm can
play an ongoing role such as resyndicating the property?
a. Do your goals or strategy vary depending upon the type or location or the property or other variables?
For example, whether there were individual or institutional investors, the market location, property
condition, whether nonprot or for prot GP/project sponsor?
8. When you are involved in the disposition of a Year-15 property, how much do you usually know about
plans for the property’s continued use? Would you know, for example:
a. Whether the property continued to be operated as aordable housing, under continued regulatory
oversight (PROG)?
b. Whether the property was relieved of regulatory oversight, but continued to essentially serve the same
population/income groups at the same rents (NON-PROG)?
c. Whether the property was repositioned to become market-rate rentals or condos, or was perhaps torn
down altogether (NON-PROG)?
d. Whether the property has been resyndicated (PROG)?
9. [If respondent seems to know this]: What proportion do you think have remained aordable housing and
what have not?
10. Do you have information on the new property owners? Do you have contact information for the new own-
ers? Do you maintain any kind of ongoing relationship with these new owners?
a. [If the respondent seems to have information on new owners]: Our study will involve interviewing a
modest number of new owners of post-Year-15 properties around the country to learn about what hap-
pened to these properties and why. Would you be able to help us contact a modest number of the new
owners of post-disposition properties?
11. [If respondent says they have good data about many or all early TC investments]: Would you be willing to
participate in the study?
a. All information collected will remain strictly condential. Findings will be reported only in the aggregate.
b. Participation in the study will involve, at a minimum, sharing database information (if available) and
an hour-long telephone interview.
c. We will be following up with day-long visits to a more limited number of syndicators. We would hope
to have the opportunity to interview individual asset managers or disposition team members both
about your rm’s general approach to disposition and about specic properties.
APPENDIX B APPENDIX B
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PHONE INTERVIEWS (10 GROUPS; APPROXIMATELY 1 HOUR EACH)
e questions for these interviews are divided into three major sections:
A. Overview of Your LIHTC Portfolio
B. Your Approach to Projects At Year 15
C. Information about Your Projects Which Have Reached Year 15
A. OVERVIEW OF YOUR LIHTC PORTFOLIO
1. Explain the study briey and describe condentiality policy
2. Can you briey describe your overall LIHTC portfolio
a. How many properties and how many units are in it?
b. Does it have a geographic focus?
c. Are the general partners (or their sponsoring aliates) generally nonprots, for prots or a mix?
d. Is there any focus on specic resident populations, e.g, families, elderly, or people with special needs?
e. Do you know how many projects in your portfolio have been foreclosed? Do you see an increase
in foreclosures?
3. How would you describe your portfolio of early LIHTC (pre-1994) properties
a. Did it include many Farmer’s Home projects?
b. Did it include many projects with project-based Section 8s?
c. Were project sponsors mostly for-prots, nonprots, or a mix?
4. Were most of your early TC investments done as public oerings to individuals or private oerings to insti-
tutional investors? If this changed over time, when did that occur and why?
5. Were many of your earliest properties (pre-1990) subject to extended aordability restrictions beyond 15
years? Do you know what were the primary sources of these restrictions: other nancing (Farmer’s Home,
HOME, etc)? State agencies distributing the tax credits? Other sources (local land use restrictions, etc?)
6. We have some questions about the market characteristics of your early LIHTC projects in comparison to
later ones:
a. What proportion of early projects are in strong versus weak market areas? E.g., could you estimate what pro-
portion were located in areas with high housing demand versus low housing demand? How does this compare
to later projects’ locations?
b. What proportion of early projects are in high rent areas versus low rent areas? How does this compare
to later projects’ locations?
c. What proportion of early projects received a basis boost for locating in a QCT (qualied census tract)?
For locating in a DDA (dicult development area)? How do these compare to later projects’ locations?
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
d. Could you comment on the standards of design for the early projects? What proportion of early
projects were built to modest design standards that are below those of the conventional rental market
today? How does this compare to later projects’ design standards?
B. YOUR APPROACH TO PROPERTIES AT YEAR 15
7. Do you aggressively pursue Year 15 property dispositions? Do you usually initiate the process, or does the
general partner? Do you begin planning for this in earlier years, e.g., years 13 or 14 or even after Year 10
when the TCs end?
a. If you work actively to initiate property dispositions, why do you do this? E.g., to end reporting re-
quirements and administrative burden?
8. Do you have a general set of goals or exit strategy when the initial limited partnerships end? For example,
is your objective to end them as simply and quickly as possible? Minimize exit taxes for LPs? Maximize
residual value and nancial return? Manage a transition to new ownership? Or see whether your rm can
play an ongoing role such as resyndicating the property?
a. Do your goals or strategy vary depending upon the type or location or the property or other variables?
For example, whether there were individual or institutional investors, the market location, property
condition, whether nonprot or for prot GP/project sponsor?
b. Are exit taxes an issue for any/many (what proportion) of your early TC projects? How are they cov-
ered? Do you anticipate exit taxes being less of an issue for later projects? If so, why? E.g., they were
covered in initial yield calculations; higher TC prices mean they are less of an issue, etc.?
c. Have you had properties sold through a Qualied Contract sales process? How many and in which
states? How were the sales handled?
d. Do you think most (the majority, what percentage of) deals do or do not have much market value at
Year 15? If not, why not? E.g., debt exceeds value; rents aren’t sucient to carry much real debt or
barely cover operating costs; they were built modestly and don’t meet current market standards for
design or nishes; they haven’t been well maintained; ongoing use restrictions limit their value, etc.
9. When you are assessing how to end limited partnerships at year 15, how do you go about preparing an
assessment of the property’s value? How do you document your exit analysis? If there is some market or
residual value, are you obliged to try to realize it for limited investors? If so, how do you approach this?
10. Do you see many/any limited partners who are selling their shares on the secondary market before or after
Year 10? Do you arrange such sales? If so, do you see any increase in them? If you have such sales, do they
impact what happens at and after Year 15?
a. If these sales have occurred, how many have there been?
b. If they have occurred, does your role continue or change?
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
C. INFORMATION ABOUT YOUR PROPERTIES THAT HAVE REACHED YEAR 15
11. How many properties that have reached Year 15 have left your portfolio?
12. What information do you retain about the outcomes for post-year 15 properties that have been in your por-
folio? (NOTE: for each of these questions, we should ask how accessible this information is: i.e., could
it be retrieved from a database, or would it have to be researched through a case-by-case review of the les.
I’m guessing that a – d could go either way, but that e & f will denitely need to determined through deal
memos, etc.)
a. Will you know whether the property continues to be subject to compliance monitoring due to extended
use LIHTC restrictions, based on its original nancing? (PROG)
b. Will you know whether the property continues to be subject to compliance monitoring due to use
restrictions from other sources in its original nancing? (PROG, maybe)
c. Will you know whether or not the property has had a disposition? (DISPOSITION/NON-DISPOSI-
TION)
d. Whether the property was relieved of regulatory oversight, but continued to essentially serve the same
population/income groups at the same rents (NON-PROG)?
e. Whether the property was repositioned to become market-rate rentals or condos, or was perhaps torn
down altogether (NON-PROG)?
f. Whether the property has been resyndicated (PROG)?
13. Do you have a database that includes information about what has happened to your LIHTC properties that
have reached Year 15? at is, whether there has been a disposition, and if so, what was the nature of the
disposition? (GP purchase versus third-party sale, for example)
a. If you have such a database would you be willing to share it, condentially, with the study?
b. Would this data include information on other major types of nancing that the LIHTC projects had
initially (e.g., Farmers Home, FHA, project based Section 8, etc?)
c. What other kind of information might be available in your database of post-Year-15 properties? Does
it include information on property size, unit conguration, special populations served in the original
project, property condition on disposition, etc?
14. What other information might you have on Year 15 properties? As in question 10, we will ask about each
piece of information, whether it’s available in readily accessible form through a database query, or whether
it would need to be researched through an individual review of the les. Note: We think it is unlikely they
will have this information for properties that have been sold, unless they are involved in resyndicating them.
a. Term of LIHTC restrictions/extended use
b. Term of other original restrictions (other than LIHTC)
c. Sponsor types – prot/nonprot; multiple properties v. single properties
d. Target populations (elderly, spec. needs, etc.) served by developments
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
e. Rehab needs at the time of renance
f. Operating statements or audits for post-Y15 properties that have not yet undergone a disposition?
g. Operating statements or audits as of the time of disposition for post-Y15 properties that have already
left the portfolio?
15. Do you have information on the new property owners? Do you have contact information for the new own-
ers? Do you maintain any kind of ongoing relationship with these new owners?
a. Our study will involve interviewing a modest number of new owners of post-Year-15 properties around
the country to learn about what happened to these properties and why. Would you be able to help us
contact a modest number of the new owners of post-disposition properties?
16. [If respondent says they have good data about many or all early TC investments]: Would you be willing to
share more detailed information with us, in a site visit to your oce? Note: If they have a data base but aren’t
willing or are unsure about a site visit, ask if they will share the data base with us, confidentially.
a. All information collected will remain strictly condential. Findings will be reported only in
the aggregate.
b. Participation in the study will involve, at a minimum, sharing database information (if available)
c. We will be following up with day-long visits to a more limited number of syndicators. We would hope
to have the opportunity to interview individual asset managers or disposition team members both
about your rm’s general approach to disposition and about specic properties.
APPENDIX B APPENDIX B
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
SITE VISITS (APPROXIMATELY 4-5 ORGANIZATIONS)
Site visits should include 1-2 interviews with senior asset management or dispositions sta about general trends in
dispositions, followed by individual meetings with asset management or dispositions sta about specic properties.
Recommend that we secure as much data in advance of the site visits as possible and that we send the question-
naires to syndicators & sta in advance.
Meeting with Director of Asset Management or other senior A.M. staff, regarding overall impressions of
exiting properties. Note, if we don’t already have the information, ask about the size and major charac-
teristics of their LIHTC portfolio (see Questions 2, 3 and 6 for the phone interviews).
1. What portion of the portfolio of projects from 1992 and earlier is subject to use restrictions that are longer
than the 15-year LIHTC period? (ese questions try to identify how much we can count on this syndica-
tor to identify PROG/NON-PROG properties.)
a. How many properties are subject to extended LIHTC restrictions? Properties from 1990 and earlier?
Properties from 1990-1994?
b. How many properties are subject to use restrictions from other sources: USDA rural funding;
project-based Section 8; HOME funds, longer state-required tax credit compliance, other state funding
programs, local funding, land-use regulatory agreements? Do you collect and maintain information on
these restrictions?
c. Are you aware of any properties that have taken steps to terminate ongoing use restrictions? How has
this worked?
2. In your role as asset managers, how much information do you have about the physical condition of the
properties as they approach Year 15? If you do get this information, how would you characterize the physi-
cal condition of most properties as they reach the end of their compliance period? What proportions are:
a. In good physical shape, with needs readily met through existing reserves;
b. In poor condition, needing major capital improvements that can only be realized through an infusion
of new capital;
c. Somewhere in between—acceptable but a bit tired?
d. Do you think the condition of many early TC properties is more problematic than later properties? If
so, why is this? E.g., Is it because more of the early projects received only moderate rehab compared to
later ones?
e. Do you know whether or not projects approaching Year 15 have reserve funds to tap for capital needs?
If you know, what proportion of projects do you think have (1) little or no reserves, (2) modest reserves,
(3) substantial reserves?
3. Do you think most (the majority, what percentage of) deals do or do not have much market value at Year
15? If not, why not? E.g., debt exceeds value; rents aren’t sucient to carry much real debt or barely cover
operating costs; they were built modestly and don’t meet current market standards for design or nishes;
they haven’t been well maintained; ongoing use restrictions limit their value, etc.
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
4. Please describe your overall policy or strategy regarding projects reaching the end of the compliance period.
a. Do you attempt to initiate a disposition as a matter of general practice? Or does this vary with owner-
ship, market conditions, or some other aspect of the situation?
b. If you seek to end the limited partnerships as a matter of general practice, why do you do this?
c. Is an assessment of the highest-and-best use of the property a part of your disposition process? Do you
actively seek disposition options that maximize real estate sale prices?
5. What are your overall impressions about projects that have completed the compliance period?
a. Have most undergone some sort of disposition?
i. For what proportion of properties does the GP or sponsor acquire the LP interests, or purchase the
properties outright?
ii. In what kinds of situations do the GP/sponsors choose NOT to acquire the properties or LP
interests? What other kinds of buyers have you found for these properties?
b. Who tends to initiate these dispositions – syndicator, investor, GP?
c. What motivates the dierent parties who might initiate a transition?
d. Do outcomes/dispositions tend to vary between nonprot and for-prot sponsors? Strong versus weak
markets? Partnerships with individuals v. institutions as investors?
6. For properties that do not transition ownership or undergo a major renancing at the end of Year 15, do
you continue to perform an asset management function? Note: We suspect that there are not many properties
in this category.
a. Collect operating information?
b. Perform audits or le checks?
c. Monitor compliance with any post-LIHTC restrictions?
7. For properties that do not transition ownership or that are simply taken over and continue to be owned by
the initial GP or its aliate, do you have a sense of what the plans were for these properties?
a. How often were owners trying to reposition the property to take advantage of higher market rents or
other market potential, i.e. condo conversion?
b. How often were owners trying to raise additional funds for major capital improvements? Do you know
what sources were typically tapped?
c. Did you see properties that were torn down?
8. For properties that do transition ownership to someone other than the initial GP or its aliate, in other
words, which have been sold to a new owner:
a. What proportion try to reposition the property to take advantage of higher market rents or other mar-
ket potential, i.e., condo conversion?
APPENDIX B APPENDIX B
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
b. What proportion re-syndicate with a new infusion of LIHTCs? (How many 9%? How many 4%?)
c. Do you see many properties repositioning to serve another low-income or special needs segment of the
population?
d. Do you see any buyers who are purchasing large numbers of TC properties or entire portfolios? Who
are they? Do you have any view of their objectives/motivations?
e. Have you had properties sold through a Qualied Contract process? Do know know how many and in
which states? How were these sales handled?
Meeting with individual Asset Managers, working off a portfolio list of properties they have handled:
For each post-Year 15 property:
1. Based on the information you have about the new or continuing owner’s plans for this property, can you
tell us whether this property:
a. Continued to be operated as aordable housing, under continued regulatory oversight (PROG)?
b. Was relieved of regulatory oversight, but continued to essentially serve the same population/income
groups at the same rents (NON-PROG)?
c. Repositioned to become market-rate rentals or condos, or was perhaps torn down altogether (NON-
PROG)?
d. Has this property been resyndicated (PROG)?
2. Has this property undergone a disposition to someone other than the initial GP or its aliate?
3. How would you characterize the original GP? Nonprot? Small for-prot developer? Mid- or large-size
private developer?
4. How would you characterize the rental market in which this property is located? E.g., weak demand, mod-
erate demand, high demand? Rising, stable or falling rents?
a. How high are vacancy rates?
b. Are LIHTC rents appreciably lower than market rents, or are they comparable?
c. What is the general condition of the market’s rental properties? Is quality at unrestricted properties
better than, worse than, or comparable to the subject?
5. What nancing did this property use during its original syndication? Do any of those sources involve af-
fordability restrictions that outlast the 15 year TC compliance period?
6. Who initiated the disposition? What was their motivation?
a. To maximize economic value/prot
b. To serve an aordable housing or community development mission
c. To end an administrative burden
d. To free up capital for reinvestment elsewhere
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
7. How much do you know about the property’s physical condition on transfer? If you have this information,
how would you describe the property’s condition:
a. In good physical shape, with needs readily met through existing reserves; in poor condition;
b. Needing major capital improvements that can only be realized through an infusion of new capital;
c. Somewhere in between—acceptable but a bit tired?
8. As far as you know, did the renance involve recapitalization and rehab? How would you assess the scope
of the rehab performed? (Dollar value, overall description—should we use a 1-to-3 or 1-to-5 scale?)
9. How much do you know about the property’s post-transfer use? Did the property remain aordable to a
low- or moderate-income population? Was this aordability under any regular compliance review?
10. What other information can you provide about the disposition of this property? Do you have a disposition
or deal memo that you can share with us?
11. Does your rm have any ongoing role with this property?
a. If so, do you have access to post-LIHTC or post-transfer operating performance information? Will you
share it with us? (Audits (if relevant); year-end statement of prot & loss, etc.) (Note: this is extremely
unlikely unless there has been no disposition, or unless the firm is involved in an ongoing role due to a re-
syndication, etc.)
12. Can you provide contact information for the property’s current owner so that we can attempt to interview
him/her?
APPENDIX B APPENDIX B
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
BROKER INTERVIEW GUIDE
LIHTC YEAR 15 STUDY BROKER INTERVIEW GUIDE (JANUARY 14, 2010)
QUESTIONS FOR BROKERS HANDLING LIHTC PORTFOLIO DISPOSITIONS
Introduction: Describe the study and its purpose; confidentiality
1. We understand that your rm has been involved in brokering the dispositions of LIHTC portfolios. How
many LIHTC portfolio sales have you brokered? Approximately how many transactions, properties, units?
a. Do you handle sales of individual LIHTC properties or only portfolios? How many individual proper-
ties have you handled?
b. Are you seeing an increase in the number of sales transactions over time?
2. Please describe a typical transaction (any details you choose to divulge will be held in complete condence):
a. How big was the portfolio? How many properties? How many units?
b. Who was the owner at the time? Nonprot? For-prot?
c. Who bought the properties? What was their intended use?
d. Is there a typical prole to the transitions, e.g., types of markets, geographic location, property
condition, etc.
3. Do sales of LIHTC properties or portfolios constitute a major portion of your business? Do you only
handle transactions of a certain size – i.e., involving a minimum number of properties, units, potential sales
price? Or are you focused on a certain geographic area or kinds of markets?
4. How do you get engaged in these deals? Who tends to seek you out – owners, syndicators, potential buyers?
5. What tends to motivate the sellers?
a. Desire to get cash from the sales?
b. Desire to exit the business?
c. Other reasons?
d. What proportion of sellers are for prots v. nonprots?
6. What tends to motivate the buyers?
a. Secure property management contracts/work?
b. Reposition the properties and rent or sell for prot or cashow?
c. Preserve aordability?
d. Other reasons?
e. What proportion of buyers are for prots v. nonprots?
APPENDIX B
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
7. For the properties whose sale you broker, do the aordability restrictions tend to remain in place? Or do
you and the buyer actively work to end those restrictions in order to increase the properties’ value and op-
tions for repositioning?
a. Does this answer vary by property types, buyer or seller characteristics, or markets?
b. If you/the buyer do take steps to end aordability restrictions, how does that process typically work?
8. [Ask the following question if it seems relevant.] When aordability restrictions have ended, what do you
see happening to the properties? E.g., they remain relatively aordable within the market, they are re-
habbed and converted to higher end rentals; converted to condos; torn down and the site use changed?
9. For projects that remain aordable, what kinds of nancing are typically used by the buyers to nance the
acquisition?
a. Do they often use a new allocation of LIHTCs? If so, do you typically see 9% or 4% credits plus bond
nancing?
10. Do most properties need capital improvements? If so, would you characterize these as modest or substan-
tial? Are they needed to reposition the housing up to today’s market standards or to remedy deciencies or
worn out materials?
11. Would you be willing to share data with us on a sample of sale transactions, with appropriate assurances
that all information will be held in strict condence?
12. Would you be willing to put us in touch with buyers or sellers of LIHTC portfolios so that we can interview
them for our study?
APPENDIX B APPENDIX C
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
APPENDIX C. OWNER SURVEY
OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
RESPONDENT INFORMATION
Respondent:
Name:
Company:
Address:
Phone:
Email:
Property Information:
Project Address:
Name of Original Project Sponsor:
- choose one -
Nonprot Status:
Number of Units:
Bedroom Distribution:
Construction Type:
- choose one -
Allocation Year:
Name of HFA:
Placed in Service Year:
Items to request prior to interview/survey:
• Current unit mix and rents
• Conrmation of LIHTC-based initial use restrictions, 15-year or 30-year
• Original sources of nancing
• Data available from HUD National LIHTC Database
Items to track during interview/survey:
Ow ner Ty pe
New Owner
Continuing Owner
Old Owner
Affordability Period
15 Years
30 Years Or More
LIHTC PROGRAM STATUS
In LIHTC Program
Not In LIHTC Program
Name of interviewee: Date of interview:
APPENDIX C
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
LIHTC 15-YEAR STUDY: INTERVIEW GUIDE FOR OWNER INTERVIEWS
PUBLIC BURDEN STATEMENT
Public reporting burden for this collection of information is estimated to average 1 hour for each response. e survey will collect
data on LIHTC property owners’ experience with the LIHTC program, gathering information that factored into property disposition
decisions. Data will also be collected on whether projects were sold and whether projects continued as aordable rental housing. is
agency (HUD) may not collect this information, and you are not required to complete this form unless it displays a currently valid
OMB control number.
APPENDIX C APPENDIX C
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
I. SCREENING AND BASIC PROPERTY INFORMATION
I-1. Are you / is your company the owner of ?
YES
CURRENT OWNER: If the current owner, were you or your aliate also the owner of the property
when it was originally placed in service under LIHTC?
YES, CONTINUING OWNER
NO, NEW OWNER
If address is wrong, enter correct address:
NO
NOT CURRENT OWNER: If not the current owner, were you the owner when the property was
rst placed in service?
YES, FORMER OWNER (owner when property was first placed in service with tax credits)
In what year did you sell the property?
NO
If neither current nor former owner, terminate the interview. Ask if the respondent can give you name and contact
information for current or former owner and try to interview.
Q I-1 comment:
Based on these questions, determine whether to treat this as a NEW OWNER property or a CONTINU-
ING OWNER property when asking further questions. Note that even if you’re talking to the old FORMER
OWNER, you should treat the property as a NEW OWNER property if it has a new owner. But try to talk to
the new owner, if possible.
NEW OWNER
CONTINUING OWNER
FORMER OWNER
APPENDIX C
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
I-2. Are you / is your company or were you / was your company either the sole owner of the property or the
general partner or sponsor of an ownership entity that also includes limited partners?
Ownership entity with partners may be a Limited Partnership (LP) with a general partner (GP) or a
Limited Liability Corporation (LLC) with a managing member.
YES, sole owner, the GP or sponsor, or managing member
NO
Not the sole owner or the GP or the managing member, confirm that the respondent is in a position to discuss
the property’s status and decisions made about it. Confirm the role of the possible interviewee; property or
asset managers may not be able to discuss owner decisions about the property.
If not a good informant, ask for name and contact information for someone more appropriate, and
terminate the interview.
I-2a. If some other type of owner, please explain.
Q I-2 comment:
I-3. Please tell me a little more about your company. Is your company for prot or nonprot?
FOR PROFIT
NONPROFIT
I-3a. Approximately how many units does your company own altogether, including this property?
Number of Units:
I-3b. [If not sure of total units] Does the company own…
MORE THAN 100 UNITS
MORE THAN 400 UNITS
MORE THAN 1,000 UNITS
MORE THAN 2,500 UNITS
I-3c. Please describe where your company does business. Do you own properties in many states around
the country, or only in certain regions?
Q I-3 comment:
APPENDIX C APPENDIX C
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OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
I-4. (NEW OWNERS ONLY) Do you know the name of the original owner? My information shows that the
original sponsor, of the property was a - choose one - Is that correct?
DON’T KNOW
YES
NO
Enter corrected information, including name of original owner and/or status of for profit/nonprofit.
FOR PROFIT
NONPROFIT
DON’T KNOW
Q I-4 comment:
I-5. Please describe your experience and what happened at property disposition.
e purpose of this question is to allow the owner to tell the story of what happened at the time of property dispo-
sition. Some of the later questions may be answered through this narrative. Please confirm answers given here
as you go through the rest of the survey.
APPENDIX C
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
Historical Property Information
New owners may not know answers to some of these historical questions about the property. Also, data on the prop-
erty may be missing from HFA data sources. For data filled in from HFA records that the respondent does not know
or cannot confirm, continue the interview based on the available HFA-based data.
I-6. I now have some more historical questions about the tax credit property. My information shows that this
property was placed in service with (low-income housing) credits in . Is that correct?
DON’T KNOW/CAN’T CONFIRM
YES
NO
Corrected placed in service year
If placed in service later than 1995, ask if the property was originally placed in service in 1994 or earlier
under an earlier allocation of LIHTC. If so, confirm or record both that date and the new PIS date;
terminate and find a replacement property, using same source that found this property.
Q I-6 comment:
I-7. Do you know if the project ever had a Rural Housing Service Section 515 loan? My information shows that
when the property was placed in service in it did not have a Rural Housing Service Section 515 loan.
DON’T KNOW/CAN’T CONFIRM
YES, there was a Section 515 loan when the property was placed in service
If the property had an RHS 515 loan when placed in service; terminate and find a replacement property,
using same source that found this property.
NO, there was no Section 515 loan when the property was placed in service
Did the property get a 515 loan at some time after the original placed-in-service date?
YES
NO
DON’T KNOW
Can continue with the interview if the property got a 515 loan after the original placed in service year.
Q I-7 comment:
APPENDIX C APPENDIX C
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OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
I-8. Do you know if the project ever had project-based Section 8 or subsidies from a similar state or local
project-based rental assistance program? My information shows that the property did not have project-
based rental assistance.
DON’T KNOW/CAN’T CONFIRM
YES, there was project-based Section 8 or similar
Was Section 8 or other rental assistance attached to the property after the original placed-in-service date?
YES
How many units or what proportion of units in the property had project-based Section 8 or
other rental assistance?
NO
DON’T KNOW
Continue interview if project-based rental assistance was attached after the original LIHTC placed in service
year and less than 10 percent of the total units got project-based rental assistance. Otherwise, terminate
and find a replacement property.
NO, there was no project-based Section 8 or similar
Q I-8 comment:
I-9. My information shows that the property hadunits, including: .
Is that correct?
DON’T KNOW/CAN’T CONFIRM
YES
NO [If available, enter correct unit count and unit distribution by bedrooms.]
Q I-9 comment:
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I-10. When originally placed in service, was the property targeting any particular population group – for example,
family, elderly, disabled, homeless, special needs, or some other population? [Other than low-income populations.]
DON’T KNOW/CAN’T CONFIRM
YES
What group?
Does the property still target a particular population?
YES [list group(s)]
NO
NO
Q I-10 comment:
I-11. My information shows that the property was - choose one - . Is that correct?
DON’T KNOW/CAN’T CONFIRM
YES
NO [Corrected answer]
If rehabilitation:
I-11a. Was the property converted from non-residential to residential use?
YES
NO
I-11b. Was the rehab substantial, moderate, or light?
SUBSTANTIAL
MODERATE
LIGHT
DON’T KNOW
I-11c. What was the approximate cost of the rehab?
LESS THAN $6,000 PER UNIT
MORE THAN $20,000 PER UNIT
SOMEWHERE IN-BETWEEN $6,000-$20,000 PER UNIT
OTHER
DON’T KNOW
APPENDIX C APPENDIX C
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OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
I-11d. Please describe the scope of the rehab.
Allow respondent to provide details of rehab work, and also probe on the conditions of the
building systems, whether new or like new, etc.
Q I-11 comment:
I-12. When this property was nanced under LIHTC, was it syndicated through an investment rm, sold to
one or more corporate investors, or sold to individual investors?
Note to interviewers: Some interviewees may not know whether the investment firm which syndicated a property put
it into an individual investor fund or into a fund with corporate investors. We have also seen at least one property
whose investor put its LIHTCs into 2 funds, one with individual investors and one with corporate investors.
SYNDICATED
IF SYNDICATED, Can you tell us the name of the rm which syndicated the tax credits in
the property?
NAME OF FIRM
Did the rm invest the LIHTCs in a fund with individual investors or with corporate investors?
INDIVIDUAL INVESTORS
CORPORATE INVESTORS
DON’T KNOW
CORPORATE INVESTORS
IF CORPORATE INVESTORS, Can you tell us the name(s) or the corporate investors?
NAME OF FIRM
DON’T KNOW
Q I-12 comment:
APPENDIX C
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OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
I-13. What debt nancing and what other nancing was used in the original nancing of the property, in
addition to tax credits? For example, did it use a commercial mortgage, HFA, and/or a HUD-insured
mortgage? HOME funds, CDBG funds, state or local own source funds, charitable funds, was it an
RTC sale?
Respondent may not have clear information regarding original financing.
Debt Financing:
Other Financing [May be considered equity if it doesn’t need to be repaid or soft debt that is not required to be repaid.]
I-13a. Did any of these funding sources require longer terms of aordability than 15 years? Please explain.
I-13b. Were there any other regulatory restrictions on the length of time during which the property
would be subject to aordability restrictions? For example, was there a land use restriction agree
ment? Please explain.
Q I-13 comment:
I-14. My information shows that the tax credit allocation/award for the property was made in .
Is that correct?
DON’T KNOW/CAN’T CONFIRM
YES
NO [Corrected answer]
Q I-14 comment:
APPENDIX C APPENDIX C
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OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
I-15. e earliest (low-income housing) tax credit awards required a federal 15-year aordability period, and
later tax credit awards required a 30-year aordability period. Was the property able to leave the LIHTC
program after the 15-year aordability period?
YES, earliest LIHTC award with no further IRS use restrictions
YES, later award with further IRS use restrictions but it has left the LIHTC program
NO, an early award but the state awarding the credits already required an aordability period
longer than 15 years
NO, later award with further IRS use restrictions
OTHER [Describe]
DON’T KNOW
Code as 15 year property or 30 year property:
15 YEAR PROPERTY
30 YEARS OR MORE PROPERTY
Q I-15 comment:
I-16. Do you know if this property is still in the (low-income housing) tax credit program? My information
shows that this property [continues to be monitored/is no longer being monitored] by
or compliance with LIHTC rules. Is that correct?
DON’T KNOW/CAN’T CONFIRM
YES, property continues to be monitored by the HFA for LIHTC compliance
NO, property is no longer being monitored by the HFA for LIHTC compliance
Code project’s LIHTC PROGRAM STATUS.
IN LIHTC PROGRAM (monitored by the HFA for LIHTC compliance)
NOT IN LIHTC PROGRAM (no longer monitored by the HFA for LIHTC compliance)
Q I-16 comment:
APPENDIX C
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
II. TRANSITION IN OWNERSHIP AND LIHTC PROGRAM
II-1. (CONTINUING OWNERS NOT IN LIHTC PROGRAM) How did you come to stop reporting
data on compliance with LIHTC program rules to the HFA? How did that work? What notications or
approvals, if any, did you need? How long did it take? [May have to explain that we’re defining leaving the
program as being no longer subject to LIHTC use restrictions and no longer reporting to the HFA]
II-1a. [30 YEAR PROPERTY] How were you able to leave the program if subject to the extended,
30-year use restrictions?
Q II-1 comment:
II-2. Is this property still aordable, still renting at rents that are within the LIHTC limits?
YES
Why did you continue to keep rents aordable?
STILL UNDER LIHTC IRS USE RESTRICTIONS
OTHER USE RESTRICTIONS
MARKET RENTS ARE COMPARABLE TO LIHTC RENTS
ORGANIZATIONAL MISSION
OTHER REASONS [Describe.]
NO
Q II-2 comment:
For CONTINUING OWNERS NOT IN LIHTC PROGRAM, go to Section III.
APPENDIX C APPENDIX C
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OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
II-3. (NEW AND CONTINUING OWNERS IN LIHTC PROGRAM) Did you ever consider changing
all or part of the property to market use?
YES
Why didn’t you pursue the change?
MARKET WOULDN’T SUPPORT HIGHER RENTS
HFA OR OTHER ENTITY OFFERED INDUCEMENTS TO STAY IN
OWNER/SPONSOR COMMITMENT TO AFFORDABLE HOUSING
OTHER REASONS [Describe.]
NO
Q II-3 comment:
II-4. (NEW AND CONTINUING OWNERS IN LIHTC PROGRAM) [30 YEAR PROPERTY] Did you
ever consider trying to leave the program through the Qualied Contract process and change all or part
of the property to market use?
YES
Did you le for the Qualied Contract Process?
YES
What happened? Please explain.
NO
NO
Why not?
ORGANIZATIONAL MISSION
COMMUNITY COMMITMENT
FORMAL OR LEGAL REQUIREMENTS
MARKET LIMITATION ON RENTS
OTHER REASONS [Describe.]
Q II-4 comment:
APPENDIX C
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OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
II-5. (NEW OWNERS) What year did the property change ownership?
Year
II-5a. Was that before or after the property passed its 15 year date?
BEFORE
AFTER
DON’T KNOW/NOT SURE
Q II-5 comment:
II-6. (NEW OWNERS NOT IN LIHTC PROGRAM) Was leaving the program (no longer being subject
to LIHTC use restrictions and reporting to the HFA) part of changing ownership or done before the
ownership was changed?
Note to interviewers: if the new owner does not know the answer to some of these historical questions, you may
have to seek an interview with the original owner. New owners may not know details that happened before
change in ownership.
PART OF CHANGING OWNERSHIP
DONE BEFORE CHANGING OWNERSHIP
II-6a. How did that work? What notication or approvals were needed?
II-6b. How long did it take?
II-6c. [30 YEAR PROPERTY] How was the property able to leave the program if subject to the
extended, 30-year use restrictions?
Q II-6 comment:
II-7. What was the mechanism used to accomplish the ownership transition in [year]?
GP BOUGHT OUT LP
SALE TO NEW ENTITY
OTHER [Describe.]
APPENDIX C APPENDIX C
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OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
II-7a. (CONTINUING OWNERS) Do you know if the original documents on the property such as
the partnership agreement or possibly an option-to-purchase or right of rst refusal for the GP
dened how a 15 year sale/disposition would be handled?
YES
What was originally dened and was this scenario followed at the disposition, or was something
dierent done?
NO
DON’T KNOW
II-7b. Was the price originally agreed upon?
YES
NO
DON’T KNOW
II-7c. If the price was determined another way, how was it determined? For example, did the general
partner and/or limited partner have the property appraised? Was a buy-out price established as
part of a renancing prior to Year 15? Did the new owner make a bid price for the property?
II-7d. If a new owner, did it work through a broker in buying the property or buy it directly from the owner?
Q II-7 comment:
II-8. What approvals, if any, were needed from the state tax credit regulatory agency or other public agencies
for the disposition of the property? Please explain.
II-9. Were any approvals needed from local government? Please explain.
Q II-9 comment:
APPENDIX C
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OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
II-10. (NEW AND FORMER OWNERS) Is there any relationship between the previous sponsor(s) and cur-
rent owners/sponsor(s) [In other words, the former owner and the new owner, respectively.]?
YES. Please explain:
NO
II-11. (NEW AND FORMER OWNERS) If the new GP or its sponsor was a nonprot, was there a bargain
sale to it?
YES. Please explain:
NO
II-12. (CONTINUING AND FORMER OWNERS) Did the LP have to pay exit taxes and, if so, were these
covered through sales proceeds paid to it? Were there any sales proceeds net of expenses and, if so, how
were they split between GC and LP?
II-13. (NEW AND CONTINUING OWNERS) Have you re-syndicated the property with a new allocation of
tax credits or sold Limited Partnership interests to one or more corporate investors or individual investors?
YES
RE-SYNDICATED
What is the identity of the new syndicator?
NAME OF FIRM
CORPORATE INVESTORS
What is the name of the new corporate investor?
NAME OF FIRM
OTHER Please explain:
NO
Do you intend to re-syndicate the property with a new allocation of (low-income housing) tax cred-
its or sell Limited Partnership interests to one or more corporate investors or individual investors?
YES
NO
Q II-13 comment:
APPENDIX C APPENDIX C
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
II-14. (NEW OWNERS) When you bought this property, what were the sources of nancing/renancing,
including any mortgage nancing, when you bought the property, including public sources (HOME,
CDBG, etc.)?
Note to interviewers: If the new owner says above that they re-syndicated the property, this may be financing in
addition to the re-syndication.
Debt Financing: [Any sources of mortgage debt that must be paid currently.]
Other Financing: [May be considered equity if it doesn’t need to be repaid or soft debt that is not
required to be repaid.]
Equity:
II-14a. What was the amount from each source? [May be listed with sources above.]
II-14b. Did any of these sources carry with them any sort of new or extended regulatory limitations
or requirements?
II-14c. Would you be willing to send us a budget with the source and uses for your acquisition nancing?
YES
NO
OTHER
Q II-14 comment:
II-15. (CONTINUING OWNERS) Did you ever renance the property?
YES
II-15a. Why was it renanced? (For example, to pay for repairs, to qualify for rent subsidies, to take ad
vantage of lower, more favorable interest rates, etc.)
II-15b. When was it renanced?
II-15c. Using what sources, including public sources (HOME, CDBG, etc.) and what amount from
each source?
II-15d. Did any of these sources carry with them any sort of new or extended regulatory limitations
or requirements?
NO
APPENDIX C
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
II-16. (CONTINUING OWNERS IN LIHTC PROGRAM) Did the property ever need an investment of
funds from its limited investors or from the general partner in order to address nancial problems?
YES
When and why? For example, was the property at risk of mortgage default, unable to maintain a
high level of occupancy, had large repair needs, had higher than projected operating expenses for
taxes, utilities, etc.?
Who invested these funds: the general partner, the investor(s), or someone else?
How much was invested?
NO
APPENDIX C APPENDIX C
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OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
III. MARKET CONSIDERATIONS – NOT IN LIHTC PROGRAM
III-1. (NOT IN LIHTC PROGRAM) Have you taken all or part of the property to market since leaving the
program – that is, have you altered the income mix of tenants, did you raise the rents beyond what LI-
HTC would have permitted, or did you convert the property to condos rather than rental housing? Was
all or any part of the property demolished or converted to non-residential use? Please explain.
If not taken to market, go to section IV, but come back here if you decide later if the property was taken
to market.
III-1a. Was all or part of the property changed?
ALL OF PROPERTY CHANGED
PART OF PROPERTY CHANGED
Please describe:
III-1b. Did taking the property to market include changing the target population—e.g., no longer
intended to serve elderly, special needs, families, if one of those was the original target population?
YES. Please describe:
NO
Q III-1 comment:
III-2. (NOT IN LIHTC PROGRAM) Please describe how the decision to take the property to market was
made. For example, who participated in this decision and how did that play out? Was the decision made
when the property was rst placed in service under LIHTC, as 15 years approached, or at a later time?
III-3. (NOT IN LIHTC PROGRAM) What were the reasons for conversion? For example, was it done
because of market opportunities (higher rents/more cash ow), to convert the property to other residen-
tial or non-residential use? Were there other nancial reasons, such as loss or change of rent subsidies or
other nancing? Please explain.
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OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
III-4. (NOT IN LIHTC PROGRAM) Did the conversion include renancing? Did the property have unmet
capital needs? What role did that play in the decision to convert? Please explain.
III-5. (NOT IN LIHTC PROGRAM) Were any approvals needed from the HFA, other public agencies, or
other nancing entities to change the use of the property? Were any approvals needed from local govern-
ment? If so, explain how they worked.
III-5a. Did the HFA try to persuade you to keep the property aordable?
YES. Please describe how:
Did you modify your plan as a result of their eorts?
YES. Please describe how:
NO
NO
III-6. (NOT IN LIHTC PROGRAM) Did local government try to inuence the changes?
YES. Please describe how:
NO
III-7. (NOT IN LIHTC PROGRAM) Did local community organizations and/or residents of the property
play a role in the decision-making or approvals?
YES. Please explain:
NO
III-8. (NOT IN LIHTC PROGRAM) Are there any circumstances in which you would have kept the entire
property aordable rental housing?
YES. Please explain:
NO
APPENDIX C APPENDIX C
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OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
IV. REFINANCING, PHYSICAL CONDITIONS OF PROJECT
IV-1. Did the property need signicant repairs/rehab before year 15, at year 15 (if new owner, at the time you
bought the property), or since then?
YES
IV-1a. When were these signicant repairs needed?
BEFORE YEAR 15. When:
AT YEAR 15 OR AT SALE
AFTER YEAR 15. When:
IV-1b. What kind of repairs / rehab were needed (for example, updating systems, modernizing units to
meet current standards, meeting current codes, etc.)?
IV-1c. How/why these repairs prioritized? Were these repairs focused on infrastructure or
market enhancement?
IV-1d. Were these completed?
YES
NO. What was completed?
IV-1e. What was the approximate cost per unit?
Cost Per Unit:
IV-1f. How were the repairs nanced? Did this include any public subsidies? What were they?
NO
Q IV-1 comment:
APPENDIX C
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
IV-2. (CURRENT OWNERS) Do you think the property reserves are adequate for its ongoing repair/rehab needs?
YES
Over what period of time do you think you will be able to meet the property’s needs for further
capital investments?
NO
IV-3. (CURRENT OWNERS) Do you expect it will need to be renanced in the next ve to ten years?
Please explain.
IV-4. (IN LIHTC PROGRAM) Is the property meeting your expectations for cash ow or nancially
stable operations?
YES
NO
Please explain.
APPENDIX C APPENDIX C
131
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
V. CURRENT STATUS AND FUTURE PLANS
V-1. [Ask if information was not received prior to interview.] If the property has remained rental, what is the
current residential rent schedule for the property?
RENTS FOR 0 BR UNITS
RENTS FOR 1 BR UNITS
RENTS FOR 2 BR UNITS
RENTS FOR 3 BR UNITS
RENTS FOR 4 BR UNITS
OTHER [Describe.]
Q V-1 comment:
V-2. Can you provide nancial performance information (one year of audited or year-end operating state-
ments) for this property?
YES
NO
Q V-2 comment:
V-3. (NEW AND CONTINUING OWNER) Do you plan to sell the property?
YES.
Please explain:
NO
Plans for Other LIHTC Properties
V-4. If you have other LIHTC projects which have not yet reached 15, do you think you will leave them
under HFA monitoring or try to leave the LIHTC program? Will you convert the properties to market
or leave them aordable? Why?
[Probe if the answer will vary for dierent types of properties or properties in dierent markets (e.g.,
urban v. rural v. suburban, or strong v. weak) or dierent geographies.]
APPENDIX C
132
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
V-5. Do you plan to acquire other LIHTC properties?
YES
NO
V-5a. What do you plan to do with those properties?
APPENDIX C APPENDIX C
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OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
VI. OWNER VIEW OF NEIGHBORHOOD AND MARKET
VI-1. How would you describe the location of the property? E.g., rural, suburban, inner city neighborhood,
other central city neighborhood, small town?
VI-2. How would you generally describe the condition of the surrounding neighborhood with regard to:
Physical Conditions (Good, Deteriorated, Mixed)
Security (e.g., High, Medium or Low Crime Rates)
VI-3. Has the neighborhood changed signicantly since the property was rst placed in service under the
LIHTC program?
YES
NO
DON’T KNOW
VI-3a. If it has changed signicantly, how has it changed?
VI-4. Has the neighborhood changed signicantly since year 15 or since you bought the property?
YES
NO
DON’T KNOW
VI-4a. If it has changed signicantly, how has it changed?
APPENDIX C
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
OMB APPROVAL NO. 2528-0269 (EXP. 07/31/2014)
VI-5. How would you describe the residential real estate market in which the property is located? For example,
not much demand, steady demand or weak demand for rental housing.
VI-5a. What are vacancy rates?
VI-5b. Are rents and values in the area stable, increasing, decreasing?
STABLE
INCREASING
DECREASING
VI-5c. Are tax credit rents lower, higher, or comparable to unrestricted rents?
LOWER
HIGHER
COMPAR ABLE
Q VI-5 comment:
APPENDIX C APPENDIX D
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APPENDIX D. NATIONAL HOUSING TRUST
ANALYSIS OF LIHTC PRESERVATION POLICIES
HFA INCENTIVES FOR USING 9 PERCENT TAX CREDITS FOR PRESERVATION,
INCLUDING OLDER LIHTC DEVELOPMENTS, 2010-2011
Source: Analysis of the National Housing Trust database of state LIHTC policies conducted by National Housing Trust, 2011.
State Agency 2010 Incentives
Alabama HFA In the 2010 QAP, AHFA has dened rehabilitation projects as being 50% or more occupied at the time of ap-
plication to be considered existing multifamily residential rental housing. Rehabilitation costs must be at least
$20,000 in hard-construction costs per unit.
A rehabilitation project that is less than 50% occupied at the time of the application is not considered existing
housing and is treated as new construction when considering funding for targeting the elderly and families. e
targeted population is not considered for rehabilitation projects that are at least 50% occupied.
Rehabilitation properties are exempt from the minimum size requirements listed under the building characteristics.
To encourage diverse site locations, only one new construction project (or rehabilitation project with less than 50%
occupancy) for families and one new construction project for the elderly will be approved within each county.
Alaska HFC Alaska’s 2010 QAP awards points to rehabilitation properties based on per-unit hard costs. e range of possible
points begins at 2 points for developments which have $15,000 - $25,-000 in hard construction costs per unit and
reaches 10 points for projects with costs of $50,001 or more in hard costs per unit. Rehabilitation costs must be the
greater of $15,000 per unit or 10% of the ‘adjusted basis’ of the building and must consist of work items that are
more than just cosmetic in nature.
Five points are awarded to all projects including rehabilitation. At a minimum, the rehabilitation must consist of
some sort of building renovation and/or demolition and reconstruction where a building is currently located at
the project site.
Arizona DoH/HFA In Arizona’s 2010 QAP, two of the general goals for allocating Tax Credits include: 1) to enable substantial
rehabilitation of existing rental housing in order to prevent losses to the existing supply of aordable apartments,
and 2) to prevent the loss from the existing stock of low-income rental housing of those units under expiring
contracts with federal agencies or subject to prepayment which, without the allocation of tax credits, would be
converted to market rate apartments.
Properties containing acquisition/rehabilitation and new construction will be given up to 30 points if the
rehabilitation apartments total 50% or more of the total property and the acquisition/rehabilitation is 100% of
the acquired apartments. Points awarded are proportional to rehabilitation costs per apartment. ese points
are also available to projects proposing the acquisition of an existing building. e points available depend on
the pro rata rehabilitation hard costs per unit including site and demolition costs less property costs, as follows:
$35,000+ earns 30 points; $25,000 - $35,999 earns 15 points; $15,000 - $24,999 earns 10 points.
In the 2010 QAP, up to 30 points are available to projects that preserve existing program or project-based rental
assistance, such as project based Section 8 or other program-based rental assistance. e number of points avail-
able shall not exceed the product, rounded down to the next whole number, of 35 times the ratio of the number
of section 8 or RD rental assistance units to the total number of units. Up to 30 points may be awarded for
proposals to preserve historic properties. Projects are only eligible for one of the three perseveration incentives.
Rehabilitation projects also receive 4 points (out of a possible 13) in the tie-breaker criteria.
APPENDIX D
136
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
State Agency 2010 Incentives
Arkansas DFA e 2011 QAP awards up to 10 points when a proposed development “involves preservation and rehabilitation
of residential rental housing under an existing state or federal aordable housing program.” (Points are awarded
according to what percent of the apartments under the aordable housing program are or become LIHTC.) e
state also provides 10 points for properties involving ‘rehabilitation of existing structures.’ Rehabilitation hard
costs must be no less than $15,000 per apartment and no less than 20% of the developer’s total costs. e basis
boost is directed toward assisted living projects and projects located in certain low-income counties.
California TCAC
& CDLAC
e 2010 Allocation regulations provide a 5% set-aside for ‘at-risk’ properties dened as properties with subsi-
dies (including tax credits) that expire within ve years prior to or after the application date. Additionally, 10
points are provided to at-risk properties as meeting housing needs. Unit square footage requirements may be
waived for rehab projects at the discretion of the executive director. Acquisition tax credits are only available to
projects at risk of conversion.
Applicants applying for competitive 9% tax credits and involving rehabilitation of existing buildings are required
to complete the higher of: a minimum of $20,000 in hard construction costs per unit unless they are ‘at risk’
properties which must complete $10,000 in hard construction costs or 20% of the adjusted basis of the building.
Colorado HFA e 2011 QAP provides 15 points for preservation developments, dened as existing tax credit developments
eligible for acquisition/rehab credits that are retaining their current income targeting and developments which
are eligible for acquisition/rehab credits and have federally subsidized rental assistance (HUD Section 8, Rural
Development Section 515, etc.). Projects involving rehabilitation of blighted buildings, and/or those with
serious building code violations that are abandoned or uninhabitable, are eligible for 5 project points. An ad-
ditional point is available for rehabilitation developments that are located in an area that is part of a community
revitalization plan. Colorado’s 2011 QAP also requires that the owner keep the units aordable for another 15
year extended use period (for a total of 30 years). e only way for an owner to get out of this is in the event of
foreclosure OR if they sell the property to another party.
Colorado awards points for projects that waive any rights to terminate the extended use period in the following
increments: 15 Years of Compliance + 5 Years of Waiver = 10 pts; 15 Years of Compliance + 10 Years of Waiver =
20 pts; 15 Years of Compliance + 15 Years of Waiver = 30 pts; 15 Years of Compliance + 20 Years of Waiver = 34
pts; 15 Years of Compliance + 25 Years of Waiver =38 pts.
Colorado was among the rst in the nation to use Tax Credit Assistance Program (TCAP) funding available
through ARRA - $1.7 Million in TCAP Funding to Support $14 Million purchase and renovation of Denver
Gardens Senior Housing.
Connecticut HFA Connecticut’s 2010 QAP designates as a priority the development of housing which “preserves the existing stock of
Federally assisted low-income housing, where loss of low-income service is possible upon prepayment of a mortgage
or expiration of housing assistance contracts.” All applicants that meet the state’s threshold eligibility criteria are
classied into one of three possible Allocation Priority Classes according to the characteristics of the proposed devel-
opments. General Class II includes applications for assistance necessary to preserve federally assisted apartments that
will be lost due to mortgage prepayment, subsidy contract opt-out or subsidy contract termination. LIHTCs will be
allocated rst to nonprot set-aside applicants, then to applications from General Class I (which can include acqui-
sition and/or rehabilitation properties if they meet the Class I requirements, such as being part of Urban Regional
Centers or Neighborhood Revitalization Zones), then to the extent available to applications from General Class II,
and then to General Class III applications. Special Class I allows for qualied new construction or rehabilitation that
is part of a comprehensive plan to replace and/or rehabilitate public housing units.
e 2010 QAP also awards up to 10 points for new construction or rehabilitation proposals that provide ad-
ditional apartments and 5 points for adaptive re-use of historic buildings, eectively acting as small preservation
disincentives. Ten (10) additional points are available for the preservation of units as long as the proposed ap-
plication does not result in a net loss of units after revitalization.
e QAP also awards up to 20 points for per-unit cost eectiveness, a key characteristic of preservation.
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
State Agency 2010 Incentives
Delaware SHA In the 2010 QAP, projects apply to specic pools, developments are ranked within those pools and the highest
scoring developments in each are separately evaluated to determine the amount of tax credits required. For 2011,
conversion developments now qualify for the Preservation Pool, which has approximately $1,199,250 of Tax
Credit Authority (45% of Delaware’s credit pool). e following types of properties are eligible for this pool: 1)
any tax credit housing development, which has completed its compliance period that is a) in need of substantial
rehabilitation or b) at risk of losing its aordability; and 2) any currently subsidized housing development that is
a) in need or substantial rehabilitation or b) at risk of losing its aordability. Up to 5 points will be awarded to
developments that are of imminent risk of losing their aordability restrictions, depending on how soon aord-
ability restrictions will expire.
Substantial rehabilitation is dened as: at least $35,000 hard cost in rehabilitation per unit and, the most recent use
must be residential, 100% of the units must be rehabilitated, and no more than 25% new units can be added.
District of
Columbia
e 2009 QAP awards 10 points to preservation projects. For projects involving rehabilitation, the costs must be
the greater of $6000/unit or 20% of the eligible basis. e 2009 QAP provides an exception to the 10-year rule
for acquisition properties with Federal or other mortgages that are subject to prepayment provisions.
15 points will be awarded to projects that extend the aordability period 10 years beyond the required 30
year restriction, and 30 points are awarded to projects that extend the period by 20 years. Projects will also be
awarded 10 points for the preservation of existing Section 8 and Section 236 projects as long as the applicant
waives the rights to the developer fee.
DHCD directs the 30% basis boost toward QCTs and DDAs.
Florida HFC e 2011 draft QAP includes an increased 50% set-aside for preservation developments. Preservation projects
are dened as rehabilitation of existing project based rental assistance developments and are required to have
construction costs of at least $10,000 in qualied basis per unit.
ere is a required 30-year period of occupancy restriction (includes 15 year federal requirement). A commit-
ment to waive the option to convert after year 14 and to set-aside units beyond the required 30-year period is
awarded up to 5 points on a pro-rata basis. Minimum extension period is 1 year and the max is 20 years, for a
maximum total length of 50 years.
ere are separate points for new construction and rehab projects under “optional features and amenities.”
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State Agency 2010 Incentives
Georgia DCA/
HFA
In Georgia’s 2010 QAP, 1.8M credits have been set-aside for preservation projects. Projects must t into one of the fol-
lowing categories to be considered for this set-aside: existing tax credit project in the 14th or 15th year; PHA develop-
ment using replacement housing factor funds or the PHA as the primary source of loans/cap funds; Section 515 for at
least 50% of the units; project based Section 8 contract with opt-out eligible with 1 year notice to tenants; HUD 236;
and any other HUD subsidized designated by HUD as a preservation project - DCA has veto power.
3 points are awarded for LIHTC project beyond 14th year or DCA HOME if statutory of aordability has
expired (points can be claimed even if structure is demolished)
New construction and rehab have same accessibility requirements. Rehab projects are required to complete a
Physical Needs Assessment and a market analysis which considers the retention of existing tenants that are not
rent burdened.
Average per unit rehabilitation hard costs must equal or exceed $25,000 for properties 20 years old or less and
the average per unit rehabilitation hard costs equal or exceed $30,000 for properties more than 20 years old. e
total hard cost of any rehabilitation project must not exceed 90% of the as-completed unrestricted appraised
value of the property.
Rehabilitation properties will be considered for funding only if the average per unit rehabilitation hard costs
equal or exceed $25,000 for properties 20 years old or less and the average per unit rehabilitation hard costs
equal or exceed $30,000 for properties more than 20 years old.
Rehab projects must have $350 per unit per year for replacement reserves. Rehab projects that are awarded cred-
its in 2010 must commence no later than Sept 30, 2011 and be completed by Dec 31, 2012.
HCDC of Hawaii In the 2009 - 2010 QAP, Hawaii provides up to 2 points for “preservation of existing aordable rental housing
at risk of being converted to market.” To qualify for these points, proposals must be 1) acquisition/rehabilitation
of a LIHTC property with an expiring compliance period (pre-1990) or an expiring extended use period (post-
1990) and agree to extend the aordability for 30 additional years; or 2) acquisition/rehabilitation of a property
which is at risk of being converted to market rate rental or for sale, which would result in lost aordable rental
apartments. In this case, the property must have a contractual obligation with HUD, USDA RD or State or
County housing programs to provide aordable housing, and must extend aordability for 30 additional years.
e 2009 - 2010 QAP also provides up to 4 points for a property that “will be receiving project based rental
assistance subsidies which would result in eligible tenants paying approximately 30% of their gross monthly
income towards rent.” Eligible programs include, but are not limited to, Section 515 or Section 8 programs. e
number of points awarded depends on how many of the apartments have project based subsidies.
Idaho HFA In the 2010 QAP, Idaho awards 15 points to developments that preserve existing rent-restricted units (dened as
a development that will be converted to market rate apartments, as determined by the Association’s review, at the
end of its aordability regulatory agreement). is is a 5-point increase from the 2008 level, returning it to the
2007 level.
Ten points are also available to developments which, due to the loss of federal project-based rental assistance
subsidy, may revert to market use. is is a 5 point decrease for the 2008 level. For a building to be considered
substantially rehabilitated, hard rehab costs during any 24-month period much equal or exceed an average of
$20,000 per unit.
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
State Agency 2010 Incentives
Illinois HDA e 2010 QAP (which governs both 9% transactions and private activity bonds) removed the $2 million
set-aside from in the 2009 QAP for rehabilitation of currently occupied low-income housing developments
whose conversion to market rate housing is likely or properties otherwise in danger of being lost due to need for
substantial rehabilitation. ere is a required 30-year period of occupancy restrictions (includes 15 year federal
requirement). Eight (8) points are given to projects that incorporate an extended use period into the extended
use agreement beyond the 30 year requirement, and 2 points are awarded for each additional 5 years beyond the
30 year requirement.
Preservation projects can receive a maximum of 15 points in the 2010 QAP, 15 points if the project is rehab of
a current low-income housing development that is nanced under Sec 8, 202/811, public housing with a 1:1
replacement rate -or- 10 points if nanced under 515 or 514 -or- 5 points if nanced under 236, 42 or projects
that are currently occupied, has no rent or income restriction and whose unit rents do not exceed 60% AMI.
Chicago
e City of Chicago receives a suballocation of tax credits from the state of Illinois. Chicago’s 2009 QAP gives
preference to non-public, at-risk federally assisted housing when awarding tax credits.
Indiana HFA Indiana’s 2011 QAP has a 20% preservation set-aside for developments which involve the substantial rehabilita-
tion of an existing structure (aordable, market rate or otherwise) and/or a development otherwise in danger of
being lost as aordable and/or the demolition and decentralization of housing units utilizing the same site (over
50% of the units must be replaced). e Authority may increase the eligible basis up to 30% for developments
whose buildings are placed in service after July 30, 2008 if the eligible basis otherwise would be a low percentage
of the total development costs due to competing under the preservation set-aside.
is includes developments being removed from the aordable housing stock by a federal agency (i.e. HUD,
Rural Development), rental housing RHTC developments with compliance periods that have expired or are
expiring in the current year, developments which entail demolition and decentralization of apartments with
replacement of apartments on the same site as described above, and the re-use of an existing structure for conver-
sion into aordable housing where a minimum of 75% of the development is converted to aordable housing
and/or its common areas. Rehabilitation hard costs must be in excess of $30,000 per apartment to be considered
in this category ($20,000 for all other set-aside categories).
Indiana also provides up to 8 points for preservation of existing aordable housing including: 8 points for the
preservation of an aordable property with rental housing tax credits that expire in the current year or earlier; up
to 8 points for the preservation of a previously HUD or USDA funded non-public housing development (such
as project-based Section 8 or RD 515 properties), with developments receiving designation of high preservation
priority from HUD or USDA getting 8 points, 5 points for medium priority and 3 point for low priority; or 6
points for proposed preservation of any other aordable housing development.
Indiana awards 7 points for rehabilitation developments that support community preservation; the development
must be at least 75% rehabilitation, part of a city of town’s revitalization plan, or Inll housing that conforms
to the existing neighborhood. e 2011 QAP oers up to 3 points for use of an existing, 100% vacant structure
into rental housing. Two points are also available for projects that are historic in nature. Five points are available
for federal assisted revitalization.
New construction and rehabilitation projects are held to dierent standards concerning unit size square footage.
Iowa HFA e 2010 QAP includes a 10% competitive set-aside for preservation of qualifying existing aordable properties
where more than 50% of the units are income-restricted and rent-restricted to households at or below 60% AMI
by Land Use Restriction Agreement, Reg Agreement, or Sec 8 project-based contract (a decrease in 10% from
2007). Additionally, 20 points will be awarded to projects where no less than 50% of the units are subsidized by
a project-based rental assistance contract. e 2010 QAP also requires 30-year period of occupancy restriction
(includes 15 year federal requirement).
APPENDIX D
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
State Agency 2010 Incentives
Kansas HRC Kansas’s 2010 QAP oers 10 points for proposals that preserve existing aordable housing “that would be
subject to foreclosure or default if tax credits were not available as indicated by deteriorating physical condi-
tion, high vacancy rate, or poor nancial performance.” Up to 20 additional points are available for rehabilitat-
ing existing units that are structurally sound, energy ecient, and aordable. e amount of points oered in
this category depends on the cost of rehabilitation. Five (5) points are available for rehabilitation costs between
$10,000 and $15,000 per unit; 5 additional points are available for every additional $5,000 per unit up to 20
points for costs in excess of $25,000 per unit. Fifteen (15) “bonus points” are awarded for each priority housing
need that is met, preservation being one of these needs.
Kansas lists additional criteria for selecting properties for acquisition and rehabilitation credits. ese include
preferences for: developments with low acquisition to rehabilitation cost ratio, developments with low proposed
rent increases, developments with no expected tenant displacement, developments with evidence that the private
sector will not nance the acquisition and rehabilitation, developments under immediate threat of foreclosure
and removal of existing tenants.
All rehabilitation proposals must involve average rehabilitation costs of at least $10,000 per unit.
Kentucky HC In the 2011-2012 QAP, 10 points are awarded for projects that rehabilitate existing rental units in order to
preserve the rental stock (minor rehabilitation such as cosmetic updates is not applicable). Substantial building
rehabilitation of at least $20,000 per low-income unit or 20% of adjusted basis, which is greater, is required.
Housing credit in the amount of approximately $750,000 is reserved for projects that have a pending application
submitted to RD for the 515 or 538 programs or to HUD for the 202 or 811 programs to receive funds. is
set-aside is for projects nanced by RD or HUD for new construction or for projects in need of rehabilitation or
order to preserve aordable rental units.
Five (5) points will be awarded to proposals submitting an existing unsubsidized project which has rents at or
below the aordable rent level.
Louisiana HFA Louisiana’s 2010 QAP grants 10 points for properties which require substantial rehabilitation (more than
$20,000/unit), 10 points for projects that involve historic rehabilitation, and 6 points for redevelopment projects
(a property can’t qualify as both redevelopment and rehab). Abandoned properties receive 10 points. Up to 5
penalty points may be deducted from a rehabilitation applicant’s score if hard costs are less than $20,000/unit, or
if the development fee exceeds 25% of hard costs.
Properties that extended the aordability period between 25-35 years may earn up to 4 points. Louisiana directs
the 30% basis boost toward QCTs and DDAs.
Maine SHA In Maine’s 2011 QAP one ‘Housing Need/Priority’ identied by the MSHA is, “rehabilitation of existing
housing stock, which does not result in displacement or substantially increased housing costs” and establishes
a priority of the housing tax credits for, “projects involving acquisition and/or rehabilitation, which add to or
signicantly rehabilitate existing rental housing stock, and are rent-restricted to the lowest income households.”
$100,000 is set-aside for rural development projects, currently nanced under a multifamily housing program,
where funding must be primarily for rehabilitation. e QAP provides 3 points to properties involving reha-
bilitation of existing housing stock of 5 or more apartments that also provide protection against displacement
and substantial increases in housing costs attributable to the rehabilitation. In addition, rehabilitation projects
containing more than 5 units that are located within designated community revitalization areas will receive 1
additional point. e QAP also includes a 90-year aordability period as a threshold requirement.
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
State Agency 2010 Incentives
Maryland DHCD In the 2009 QAP, up to 20 points are awarded to applicants with long-term operating subsidies (up from 10
points in 2008), including project based rental subsidies. Applicants requesting tax credits from the 2009 QAP
must agree to at least 40 years of low-income occupancy restrictions unless a structured 15 year homeownership
program is created and accepted.
For projects in either a qualied census tract or dicult to develop area, 10 points may be awarded under this
category for rehabilitation or replacement projects, or 5 points for new construction projects, in neighborhoods
that have existing community revitalizations plans.
ere is a $15,000/apartment rehabilitation threshold, but DHCD may waive this if there is a strong need for
preservation in the area of the proposal or if aordable apartments will be lost if the property in question is not
nanced using Department funds.
Maryland has a 30% state basis boost that they will direct toward projects that need additional funding to be
nancially feasible. is is separate from the 30% boost reserved for QCTs and DDAs.
Massachusetts
DHCD
For 2010, 40% of the available allocated credits are set aside for preservation properties (up from 35% in 2008),
dened as: 1) housing at risk due to market conversion, 2) housing at risk due to physical condition and nan-
cial distress, 3) application represents a time-limited opportunity to purchase existing aordable housing, and 4)
units are located in a large-scale signicantly distressed public housing development and HOPE VI was already
awarded. e minimum property size for the preservation set-aside is 8 apartments.
One of the eight priorities established in the 2010 QAP is “projects that preserve valuable existing aordable
units.” Additionally, a property must meet the threshold of demonstrating consistency with the Commonwealth’s
Principles of Sustainable Development. e rst of these 10 principles encourages re-using existing structures.
Applicants are required to commit to a 30 year term of aordability; projects which commit to 50 years of af-
fordable rents receive 6 points.
e 30% basis boost may not be applied to the acquisition basis - only rehab projects that are located in a QCT
or dicult-to-develop areas.
Massachusetts has a unied application process, allowing developers to apply for low-income housing tax credits
along with a variety of other funding options.
Michigan SHDA MSHDA’s 2011 QAP targets 30% of its competitive 9% credits to preservation proposals. Preservation applies
to the acquisition and renovation of existing properties. Adaptive re-use projects and entirely vacant residen-
tial buildings will not be considered new construction. Additionally, MSHDA provides substantial incentives
available only to preservation applicants, including points for: containing rent increases, preserving project-
based subsidies for the duration of or longer than the compliance period, acquisition costs less than 60% of the
development cost, insucient capital to provide needed continuing renovations and repairs, high-risk distressed
properties (not in need of demolition), rehabilitation costs greater than $20,000 per unit (with more points
awarded to applicants proposing costs greater than $30,000 per unit), local funding of at least $5,000 per unit,
federal funding for at least 30% of units, and replacement or redevelopment of public housing units.
Eligible preservation properties include those with nancing from HUD, USDA Rural Development, or
MSHDA that is within 5 years of permitted prepayment of equivalent loss of low-income use restrictions; other
below-market nancing, properties with previous government funding of at least $100,000; redevelopment of
public housing units; or year 15 LIHTCs, allocated in 1994 or earlier.
Projects meeting the threshold requirements for preservation are eligible for the 30% basis boost.
APPENDIX D
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
State Agency 2010 Incentives
Minnesota HFA Minnesota’s 2011 QAP requires applicants to meet at least one out of ve thresholds requirements. One of these
threshold requirements is: properties which preserve existing subsidized housing, if the use of tax credits is neces-
sary to (1) prevent conversion to market rate use or (2) to remedy physical deterioration of the property which
would result in loss of existing federal subsidies.
Minnesota awards 10 selection points for the preservation of existing tax credit apartments and 20 preference
points for the preservation of federally assisted apartments. Ten (10) points are also awarded for rehabilitation
properties that meet certain minimum criteria, with 2 additional points if the proposal is part of a community
revitalization plan. In order to receive preservation points, applicants must demonstrate that, without tax credit
allocation, the aordable units would be lost either through the loss of subsidies within the next two years, con-
version to market rate, or deterioration.
Minnesota awards 3 selection points to applications proposing to acquire and rehabilitate a Foreclosed Property
or are located in a Foreclosure Priority Area identied by Minnesota Housing that has been heavily impacted by
the foreclosure crisis.
Mississippi HC e 2010 QAP provides 15 points for applicants that are preservation, Hope VI developments or Historic
preservation. ere is another 10 possible points for a property that “preserves existing developments serving
low-income residents that would be lost due to conversion to market rate, loss of rental assistance, foreclosure
or default, and mortgage prepayment, or housing lost in a presidentially declared disaster area. To be eligible,
the development must be currently in danger of conversion, foreclosure, default.” In addition, the QAP awards
10 points (up from 7 in 2008) for applicants with development-based rental assistance for at least 51% of the
development’s apartments for ve or more years or 3 points can be awarded if the project has tenant-based rental
assistance (but not if receiving points for development-based assistance). Five (5) points are awarded for projects
that received a commitment from the Preservation Loan Fund - rehab 515 housing.
All properties committing to an extended compliance period of 40 years or longer are awarded 5 points. Ten (10)
points are available if 20% of the units are set-aside for residents at 50% or lower AMI plus there is a commit-
ment to provide housing for 40 years.
Missouri HDC Missouri’s 2011 QAP lists preservation of existing aordable housing as one of its six housing priorities. De-
velopments that are not considered for the preservation priority but that do not contemplate the acquisition
and rehabilitation of existing housing are encouraged and given extra consideration. e QAP does not have a
numerical criteria system but MHDC will prioritize developments that have project-based rental assistance or
operating subsidy or have a loan made prior to 1985 from any of the following loan programs: HUD 202/811,
221(d)(3) or (d)(4), 236 or USDA RD 515. Projects can also qualify under this priority through participation
in HUD’s Mark-to-Market restructuring program or by having a previous allocation of LIHTC prior to 1996.
Rehabilitation projects seeking 9% credits must have construction costs equaling 40% of more of the total
replacement costs. Proposals determined to meet the preservation priority quality for a 30% basis boost.
APPENDIX D APPENDIX D
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
State Agency 2010 Incentives
Montana BoH/HD e 2011 QAP provides up to 2 points for properties that propose the preservation of existing federally assisted
housing stock or increase the aordable housing stock through the use of the Rural Development 515 program,
HOME program, the CDBG program or the FHLB Aordable Housing Program.
If an owner substantially rehabilitated a building (by incurring rehabilitation expenditures the greater of either
$10,000 hard costs per rental unit or an amount which is not less than 205 of the adjusted basis of the building
during a 24-month or shorter period), the rehabilitation expenditure is treated as a separate new building for
purposes of the tax credit.
e QAP also provides up to 4 points for the appropriateness of the property for the area’s housing market (rehab.
vs. new construction, or addressing vacant buildings). Comparisons will be made with the Market Study to deter-
mine how it addresses the considerations for rehabilitation or preservation of existing housing versus need for new
construction. e QAP also provides 2 points for existing housing stock or properties applying for rehabilitation
tax credits that have completed their initial 15-year compliance period. Projects are eligible for up to 10 points for
committing to extend low-income use beyond 15 years depending on the length of the commitment.
Nebraska IFA In the 2011 LIHTC application Self-Scoring Other Selection Criteria, 3 points are given to federally-assisted
buildings in danger of having the mortgage assigned to HUD, RD, or of creating a claim on the federal mort-
gage insurance fund. Four points are available to developments involving the preservation of existing aordable
housing.
Nevada HD e 2010 QAP provides 3 points for projects that involve either “the acquisition and rehabilitation of at-risk
properties listed in the National Housing Trust Publication” or preservation of a property “in an area covered by
a state or local revitalization plan/strategy targeting the rehabilitation of existing housing.”
Rehabilitation developments must demonstrate that the rehab is substantial and involves at least $40,000/apart-
ment for expiring Section 8 and HAP projects or $10,000/apartment for other rehab projects in direct hard
costs. Acquisition/Rehab, Conversion or Change of Use Properties will be ranked based on the per-apartment
rehabilitation investment (hard construction costs/number of apartments in the property). e property with the
highest per-apartment rehabilitation investment will receive 10 points and the second highest scoring property
will receive 5 points.
Applications are scored and ranked by project type: Individuals/Families with Children; seniors; Assisted Living
Developments; Mixed Income/Mixed Use; Projects Promoting Eventual Tenant Ownership; and Acquisition/Re-
habilitation projects. e Acquisition/Rehabilitation category includes acquisition/rehab for projects with expir-
ing Section 8 or HAP contacts, acquisition/rehab/conversion/change of use, and rehabilitation only. To qualify
for acquisition/rehab for projects with expiring Section 8 or HAP contracts, 75% of the units must be preserved
as aordable housing with rents at or below LIHTC rents. e application with the highest percentage of units
receiving rental assistance times the number of years of the contract will be awarded 15 points. e application
with the second highest will receive 10 additional points.
New Hampshire
HFA
In New Hampshire’s 2011 QAP, preservation projects are not eligible to apply for 9% LIHTC except for projects
that are to be demolished and/or reconstructed while retaining or extending the project based rent subsidy
contracts. Preservation projects are those that have been funded with federal project based rent subsidies that are
currently subject to recorded regulatory documents limiting unit rents and/or tenant incomes.
Properties that are located in formally-designated community revitalization areas, such as HUD Enterprise
Zones, Main Street programs, designated blighted areas, or otherwise targeted areas can receive an additional 1
point if they preserve or renovate existing housing. e plan also establishes a minimum rehabilitation threshold
of $6,000 per apartment or 20% of the depreciable basis of the building.
In a tie-breaker, new construction is favored over preservation. Combination projects are considered new construction.
APPENDIX D
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
State Agency 2010 Incentives
New Jersey HMFA New Jersey’s 2010 QAP includes four funding cycles: Family will receive at least $9 million, Senior will receive
at least $3 million, Supportive will receive at least $2 million, and Final will receive whatever credits are left over
from the other cycles. For the Final cycle the highest ranked preservation proposal will be the rst development
funded. Preservation projects are dened as housing projects that are at least 50% occupied and at risk of losing
its aordability controls or level of aordability. In general, minimum rehabilitation projects, proposals in which
construction costs are less than $25,000 per unit, are not eligible for competitive tax credits but they may be
funded if there are no other eligible projects during the Supportive or Final cycles.
In the family and nal cycles, rehabilitation projects receive 3 points that generally only low-density buildings
with large family units are eligible for. In all cycles, rehabilitation of historic buildings is worth 2 points.
New Mexico MFA New Mexico’s 2011 QAP awards 15 points to all rehabilitation properties incurring average rehabilitation hard costs
of $10,000/apartment or more. In combined new construction and rehabilitation, rehabilitated apartments must
account for at least 20% of the total apartments and the separation of rehabilitation costs and new construction
costs should be designated in the application. An additional 15 points is awarded to conversion plus rehabilitation
properties that convert at least 50% of the existing market rate apartments to low-income apartments. ere are
15 points available for preserving previously subsidized properties in which rents for 75% of the apartments are
currently in excess of HTC Ceiling Rents and will be reduced to HTC Ceiling Rents, or for which use restrictions
are to expire on or before December 31st, 2015. Rents will be limited to HTC ceilings despite other subsidy rules,
except in properties with project based subsidies that allow for rents in excess of HTC ceilings. Note that projects
receiving points from the rehabilitation-only category can receive points under the conversion plus rehabilitation
OR the preservation category but not both, even if they are otherwise eligible for them.
Rehabilitation expenditures qualify for the 9% tax credit when rehabilitation costs incurred during the
24-month period equal or exceed the greater of $6,000 per low-income unit or 20% of the adjusted basis.
New York State
DHCR
DHCR
e New York State Division of Housing and Community Renewal (DHCR) is the lead Housing Credit Agency
for the State of New York. DHCR’s 2009 QAP denes preservation as property being rehabilitated to extend
its useful life, which averts the loss of aordable housing and currently serves a population whose housing need
would justify the replacement of the housing if it ceased to be available to that population. is denition does
not distinguish between aordable unsubsidized or subsidized rental housing. e scope of the rehabilitation
must be sucient for the property to function in good repair as aordable housing for a period equal to at least
30 years from the date of issuance of the nal credit allocation. Projects are required to maintain a 30-year period
of occupancy restrictions (includes 15 year federal requirement). Ten (10) points are given for further extensions
and 15 points for waiver of the right to terminate the extended use period.
Preservation projects only need to meet visit ability standards as feasible. e acquisition cost cap (of 25% of
total costs) is waived for preservation projects.
Some competitive criteria act as preservation disincentives: Projects get 1 point for being located on a browneld
or grayeld, or for being an adaptive re-use project. Projects get 6 points for having a certain percentage of fully
accessible units.
NY HFA
Dev. Auth. of N.
Country
APPENDIX D APPENDIX D
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
State Agency 2010 Incentives
NYC HPD HPD
New York City’s Department of Housing Preservation and Development (HPD) receives an annual sub alloca-
tion of tax credits from the state. DCP’s 2010 QAP states as one of its goals preserving “73,000 units of aord-
able housing for 220,000 New Yorkers, with a special emphasis on preserving units where subsidies are set to
expire in the near future.”
Up to 16 points are available for “project characteristics.” Preservation projects -- projects that preserve existing
aordable housing that either: a) have, and continue to use if possible, project-based rental assistance and/or
operating subsidy; b) have a loan made prior to 1984 from any of the following loan programs; HUD 202/811,
221(3)3 or (d)4 or 236; c) an HPD LIHTC Preservation Program where HPD has approved a re syndication
plan -- and rehabilitation of existing housing are eligible for these points.
North Carolina
HFA
North Carolina’s 2011 QAP includes a 20% rehabilitation set-aside. To be eligible for the rehabilitation set-aside,
a property must have either mortgage subsidies from a local government in excess of $5,000 per unit or have
federal rental assistance for at least 30% of the total apartments plus hard construction expenses in excess of
$15,000/unit and been placed in service on or before December 31, 1995.
Preservation and rehabilitation applications do not receive point scores but instead are evaluated using an alter-
nate criteria set. Priority will be given to the state’s most distressed federally subsidized housing.
North Dakota
HFA
e 2011 QAP awards 10 points for preserving federally assisted properties “at-risk” of being lost to market rate,
including existing housing credit projects. In addition, properties with rehabilitation expenditures of $15,000 up
to $30,000 per apartment receive 5 points, those with rehabilitation expenditures of $30,000 or more per apart-
ment receive 10 points, and all rehabilitation projects part of a community revitalization plan will receive an
additional 3 points. NDHFA will waive the $15,000 minimum rehabilitation threshold requirement if a capital
needs assessment supports a lower rehabilitation requirement.
NDHFA awards up to 9 points for extending the aordability period for 5, 10, or 15 years. North Dakota
directs the 30% basis boost toward to QCTs, DDAs, and
(1) projects designed to primarily serve special needs populations, i.e. homeless or those requiring permanent
supportive services;
(2) projects that target 20 percent or more of the units at 30 percent of area median income or less;
(3) projects within tribal reservations, including the Trenton Indian Service Area;
(4) new construction projects on in-ll lots a) with existing structures which need to be demolished, or b)
require substantial environmental remediation; and
(5) projects in rural areas without sucient soft nancing to be nancially feasible in low market rent areas.
Proposed rents (including utility allowance) must be the lesser of a) Fair Market Rents (FMR) or b) a minimum
of 20% below Housing Tax Credit rent ceilings, either of which will be enforced through a land use restriction
agreement (LURA). Developments with a project based federal rent subsidy are not eligible.
APPENDIX D
146
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
State Agency 2010 Incentives
Ohio HFA In the 2011 QAP, Ohio set aside $9.5 million of the low-income housing tax credits in a “preservation pool.”
Properties that are eligible for the preservation pool include the following:
a) Properties receiving project-based rental subsidy through a Section 8 Housing Assistance Payment Program
(HAP) contract;
b) Troubled properties that have received assistance through the USDA Rural Development (RD) oce;
c) Properties participating in the HUD Portfolio Reengineering Program (so-called Mark to Market). Projects
that have closed their nancing under this program and have not yet placed-in-service are eligible for the pool;
d) Existing HUD Section 202 or 811 projects;
e) Existing HUD Section 236 properties;
f) New construction projects that preserve existing subsidies, such as HOPE VI, Choice Neighborhoods, or the
use of Section 8 portability;
g) Other properties judged by OHFA to encompass preservation principles.
e minimum hard construction costs for rehabilitation properties are $10,000/unit or 40% of total project
costs, whichever is greater with the exception of project with tax-exempt bond nancing in which minimum
hard costs equal $6,000/unit. e QAP grants exceptions for rehab projects from mandatory design standards
infeasible for existing buildings.
ere is a required 30-year period of occupancy restrictions (includes 15-year federal requirement). Projects with
a demonstrated nancial need will be considered for the 30% basis boost on a case-by-case basis.
Oklahoma HFA For 2010, the application packet awards 5 points to projects that preserve aordable housing units from pre-
1995. ese projects can be:
•Propertieswithexpiringproject-basedSection8contracts
•PropertieswithUSDASection515loans
•PropertiesnancedwithLow-IncomeHousingTaxCredits
•PropertiesnancedwithSection202/811loans
•Propertiesnancedwith1937HousingActfunds.
Oregon HCS In the 2009 Qualied Allocation Plan, the state maintains its 25% set-aside for preservation properties (note
that the amount of 9% tax credits actually used for preservation in 2006 was about 30%). Preservation proper-
ties include but are not limited to federally-nanced existing properties where at least 25% of the property’s
apartments have project based rental assistance or are expiring LIHTC properties which are currently oering
rents 10% below market. Properties participating in, but not limited to the following programs, are considered
federally nanced: HUD, USDA Rural Development, and properties participating in programs that include the
replacement of existing aordable housing units, including the HOPE VI program, as long as 25% of the units
have project based assistance, and expiring LIHTC projects. In funding preservation projects, preference is given
to applications that have at least 25% project based rental assistance. Projects are required to maintain a 30-year
period of occupancy restrictions (includes 15-year federal requirement). Additional consideration will be given to
projects which agree to extended use beyond 30 years.
Preservation projects are considered “dicult-to-develop areas” and are therefore eligible for the 30% basis boost.
Projects that serve permanent supportive housing goals, address workforce housing needs, are located in Transit
Oriented Districts (TODs) or Economic Development Regions (EDRs) or in a designated state or federal em-
powerment/enterprise zone or Public Improvement District (PIDs), or other area designated for neighborhood
preservation, redevelopment, or use of public transportation are also eligible for the basis boost. All projects must
also commit to an extended use term of aordability of a minimum of 30 years.
APPENDIX D APPENDIX D
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
State Agency 2010 Incentives
Pennsylvania HFA Pennsylvania’s 2010 QAP maintains the 15% preservation set-aside. Eligible properties include: (a) existing low-
income units receiving project-based rental subsidies that are within two years of any permitted prepayment or
subsidy contract expiration with a likely conversion to market rate housing or equivalent loss of low-income use
restrictions; (b) developments requiring rehabilitation of systems or components in immediate need of repair or
replacement, or (c) rehabilitation of already existing low-income units provided that the rehabilitation is being
funded through the Agency and the development will be monitored through an Agency preservation program.
Preference may be given to developments that face conversion to market or which have rehabilitation scope of
work that addresses signicant life safety issues.
Developments must expend for rehabilitation a minimum of $10,000 per unit in construction costs on major
systems and components.
Preservation projects are exempt from the requirement to ensure at least 25% of total units of a rehab develop-
ment are visitable. ey may be required to provide air conditioning if nancially feasible.
Rehab and preservation developer fees are limited to 10% of purchase price of the property less the cost of land.
ere is also a required commitment to serving low-income residents for a period of not less than 30 years OR
oer homeownership opportunities to qualied residents after the initial 15 year compliance period.
Puerto Rico HFA
Rhode Island
HMFC
In the 2011 QAP, priority will be given to properties involving the substantial rehabilitation or redevelopment of
deteriorated residential properties (substantial rehabilitation entails construction/rehabilitation costs in excess of
50% of replacement value).
For a building to be substantially rehabilitated, the expenditures during any 24-month period must be at least
the greater of: (a) 20% of the depreciable basis of the building determined as of the rst day of the 24-month
period; or, (b) an average of $6,000 per low-income unit. Exceptions may apply for properties acquired from
government entities and “expiring use” properties. Rhode Island may also provide an exception to their 10 year
placed in service restriction for expiring use properties.
South Carolina
SHFDA
In the 2011-2012 QAP, the South Carolina State Housing Finance and Development Authority (SHFDA)
reserved up to $1,200,00 (down from $1,275,00) for preservation projects. is set-aside is for 100% rehabilita-
tion developments only. SHFDA reserves up to $700,000 of the state LIHTC ceiling for the exclusive use of
eligible Rural Housing Service (RHS) developments. HOME funds will be provided to the set-asides as follows:
Rehabilitation - $780,000; RHS - $390,000. Rehabilitation properties applying for 9% tax credits must have at
least $15,000 in hard constructions costs per unit, with at 50% of the costs attributable to interior unit costs.
Projects can receive 5 points for extending the commitment period an additional 5 years. e eligible basis boost
is directed toward QCTs, DDAs, 100% elderly projects, 100% special needs housing, and projects for older
persons or families.
South Dakota
HDA
South Dakota removed their 60% preservation set-aside in the 2011-2012 QAP. Properties involving existing
development receive 75 points while new construction properties receive up to 10 points. To be eligible for
competitive tax credits projects must have substantial rehabilitation costs, at least $10,000 per unit or 20% of
the original basis, whichever is greater. South Dakota’s denition of preservation allows for presently aordable,
multifamily, unsubsidized rental housing to qualify as preservation.
Projects that commit to a 40 year extended use aordability agreement will receive 80 points. e 30% basis
boost is directed to projects located in QCTs or DDAs; projects that are part of a concerted community revital-
ization plan; service-enriched housing; rural projects; and historic rehabilitation.
Tennessee HDA Tennessee’s 2011 QAP awards up to 40 points for rehabilitation developments involving replacement of major
building components. Developments involving the use of existing housing as part of a community revitalization
plan receive 1 point. No more than 40% of the total amount of tax credits available will be allocated to develop-
ments involving rehabilitation.
APPENDIX D
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
State Agency 2010 Incentives
Texas DHCA In the 2010 QAP, at least 15% of the allocation to each region is set aside for ‘at-risk’ developments. To be eli-
gible, subsidized properties include those insured under the HUD Section 221(d)(3) and (5), Section 236, Sec-
tion 202, Section 101; those provided subsidies via project-based Section 8 programs; USDA Section 514, 515,
516; and Section 42 of the IRS Code. e property’s contract providing the subsidy must be nearing expiration,
or the mortgage must be eligible for prepayment or nearing the end of its mortgage term. Developments must be
at risk of losing all aordability on the site and properties must renew or retain any federal assistance for which
they remain eligible.
TDHCA allows expiring tax credit properties to apply under the ‘at risk’ set-aside. All rehabilitation proposals
(including reconstruction) or adaptive reuse proposals are awarded 3 points.
In the event of a tie, applications involving any rehabilitation of existing apartments will win this rst tier tie
breaker over applications involving solely New Construction.
Developments proposing adaptive re-use or proposing to increase the total number of units in the existing resi-
dential development are not considered rehab or reconstruction.
In addition, developments that consist solely of acquisition/rehabilitation or rehabilitation only may exceed the
maximum unit restrictions. Rehabilitation developments must establish that the rehabilitation will substan-
tially improve the condition of the housing and will involve at least $15,000 per unit in direct hard costs unless
nanced with TX-USDA-RHS in which case the minimum is $9,000.
If a developer extends the years of aordability beyond the required 30 by 5 years, 2 points are available - by 10
years, 4 points are available.
Utah HC Utah’s 2011 QAP designates the ‘preservation and improvement of existing aordable housing units’ as a hous-
ing need and the rehabilitation of ‘existing housing stock for tenants at the same or less than current rents’ as a
housing priority for the allocation of credits (although no specic set-aside is given). e 2011 QAP awards 10
points to properties that rehabilitate the existing housing stock and maintain rents at or below the rent levels
before negotiations were entered into for the Housing Credit Application. is is only available to substantial
rehabilitation properties that maintain or lower targeted rents below those paid by the current tenants and to
preservation properties that maintain rent levels. e minimum rehabilitation expense per unit for substantial
rehabilitation projects is $6,000 or 20% of the adjusted basis, whichever is greater. e following minimum
rehabilitation expenditures are based on the age of the building(s): pre-1940 necessitates a minimum of $50,000
per unit; 1940 - 1970 necessitates a minimum of $35,000 per unit; 1971 - 1990 necessitates a minimum of
$25,000 per unit. e state also awards 5 points to properties that involve the use of existing housing as part of a
Community Revitalization Plan.
Vermont HFA Vermont’s 2009 - 2010 QAP does not provide a point allocation system but instead states Evaluation Criteria
and Top Priorities. e 5 Top Tier of these priorities include projects the provide rehabilitation, including lead-
based paint abatement, accessibility modications, and energy eciency upgrades (along with inll new con-
struction or places that lack aordable housing). e Second Tier priorities include creative rehab of a historic
structure of statewide signicance. Preference must also be given for the acquisition and rehab of existing federal
subsidized projects, where preserving aordability is at-risk. Nine percent (9 %) credits required to be aordable
into perpetuity.
Rehab projects should be at least $6,000/unit or 20% of adjusted basis.
Projects that are less than 49 units and either meet Green Building and Design Standards or are 15% market
unites are eligible for the 30% basis boost.
Virgin Islands HFA
APPENDIX D APPENDIX D
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
State Agency 2010 Incentives
Virginia HDA e 2011 QAP awards 20 points to developments currently subject to HUD’s Section 8 or Section 236 pro-
grams or Rural Development’s Section 515 program. In addition, 10 points are awarded to developments receiv-
ing new project-based subsidy from HUD or RD for the greater of 5 apartments or 10% of the apartments of
the proposed development. All applications seeking credits for rehabilitation of existing apartments must provide
for contractor construction costs of at least $10,000 per unit.
Washington State
HFC
e 2010 QAP provides non-numerical priority for projects intended to ‘preserve federally assisted projects as
low-income housing units’ and ‘rehabilitate buildings for residential use.’ At-risk properties that meet the follow-
ing criteria are awarded 10 points: (1) the project has one or more Federally Assisted Building(s); (2) at least 50%
of the total housing units in the project are low-income; (3) the applicant agrees to maintain the low-income
housing units included in the project for a minimum of 30 years (i.e., make an additional low-income housing
use period Commitment of at least 12 years); (4) the Federal agency regulating the low-income use certies that
the owner may be released from all low-income use restrictions within ve years of the date of the Application;
and (5) the market study clearly demonstrates that (a) market rate rents are signicantly greater than current
rents being charged and (b) those market rate rents are achievable, creating the likelihood that existing residents
will be displaced as a result of increasing rents.
Points are also awarded to rehabilitation proposals. Five points are awarded if a rehabilitation proposal rehabili-
tates at least 80% or more of the total existing housing units that exist in the project prior to rehabilitation or
the conversion of one or more buildings from non-residential use and 50% or more of the total residential units
in the project are included in the converted building(s). Rehabilitation proposals that are part of a community
revitalization plan receive an additional 2 points.
Projects located in Dicult to Develop Areas, Qualied Census Tracts, and rural areas are eligible for the 30%
basis boost.
West Virginia
HDF
West Virginia’s 2009-2010 QAP sets aside 15% of credits for rural preservation and 25% for “HUD preservation
or new construction.” In the latter set-aside, new construction proposals receive between 40-50 points, depend-
ing on size, while rehab and acquisition/rehab proposals can only earn 0-30. However, in addition, for substan-
tial rehabilitation properties or acquisition and substantial rehabilitation properties, an additional 10 points will
be awarded if any such property includes the use of existing housing that is a clearly and specically stated part
of a community revitalization plan.
Ten points will be awarded to properties committed to continuing to serve qualied tenants at rent-restricted
rates for each year beyond the close of the initial 15-year minimum compliance period, up to a total of 150
points for 15 years beyond the minimum compliance period.
Several “quality of housing” criteria may act as moderate preservation disincentives, including 25 points for
minimum room sizes, 10 points for roofs with 30 year manufacture warranties, and 5 points for oering washer
and dryer hookups in each unit.
Wisconsin HEDA Wisconsin’s 2011-2012 QAP includes a preservation set-aside of 30% (approximately $3,562,507) for feder-
ally assisted housing units. Federally Assisted Housing Preservation includes low-income housing developments
subsidized under the following or similar programs: Section 236, Section 221(d)(3) Below Market Rate (BMIR),
Section 221(d)(3) Market Rate with Section 8 rental assistance, Section 8 project-based new construction, Sec-
tion 202, Section 811, Section 221(d)(4), and Section 515-Rural Rental Housing Program, Rural Development,
USDA and NAHASDA or other tribal subsidies.
Additionally, 30 points are available for acquisition/rehabilitation, dened as a development proposing rehabili-
tation, or acquisition and rehabilitation, of existing housing units.
APPENDIX D
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
State Agency 2010 Incentives
Wyoming CDA In Wyoming’s 2011 QAP, rehabilitation properties must have a minimum expenditure of $15,000 of actual reha-
bilitation hard costs per apartment in Life, Safety, Health, or Code Requirements which includes required major
systems repairs or replacements of electrical, heating, roong, foundation/structural, major energy upgrades. No
more than 30% of rehabilitation costs can go for required General Property Improvements, (non-Life, Safety,
Health, or Code Requirements).
A property will receive up to 10 points if the current property involves use of existing housing as part of a com-
munity revitalization plan. Under the tie-breaker criteria, rehabilitation properties can receive up to 40 points for
amenities and/or cost-eective upgrades.
Wyoming awards up to 35 points for extending up to 20 years beyond the initial 30 year aordability period.
e basis boost is directed toward dicult to develop areas.
APPENDIX D APPENDIX E
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
APPENDIX E. HUD NATIONAL LIHTC
DATABASE, MISSING DATA BY PLACED IN
SERVICE YEAR
Variable (or Variable Group)
Year Placed in Service
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Project Address
a
0.74 0.58 0.90 0.64 0.61 0.49 0.21 0.41 0.33 0.49 0.51 1.03
Owner Contact Data 6.40 3.77 4.88 6.17 5.98 7.09 7.99 9.92 4.90 3.21 5.99 7.96
Total Units 6.03 3.42 3.64 1.21 1.49 0.49 0.62 1.03 0.13 0.28 0.73 0.29
Low-Income Units 2.46 2.67 4.20 4.47 2.24 1.89 1.79 0.82 1.19 1.05 1.83 0.88
Number of Bedrooms
b
38.42 40.85 43.27 39.15 33.97 36.21 39.39 37.28 17.01 14.68 16.67 12.68
Allocation Year 1.97 0.87 1.57 0.14 0.14 4.49 3.65 4.99 0.26 0.07 0.07 0.07
Construction Type (new/
rehab)
12.93 9.62 10.26 9.86 10.12 15.65 15.77 19.43 5.43 4.47 3.51 3.98
Nonprot Sponsorship 21.92 26.25 31.33 29.72 33.22 29.33 29.34 25.72 14.30 12.30 11.33 9.80
Use of Tax-Exempt Bonds 36.58 38.47 40.47 33.55 36.48 37.61 38.29 34.88 4.96 3.21 4.09 5.08
Use of RHS Section 515 19.09 20.10 23.65 25.60 20.31 26.74 24.59 31.33 11.85 9.36 10.53 14.81
Variable (or Variable Group)
Year Placed in Service
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Project Address
a
1.03 1.04 0.87 0.49 0.37 0.33 0.79 1.16 0.85 0.84 3.18 3.04
Owner Contact Data 7.96 7.85 7.11 5.76 3.26 3.25 3.17 4.07 1.24 0.77 9.94 11.13
Total Units
0.29 0.71 0.87 0.35 1.11 0.73 0.40 1.52 1.11 1.95 4.82 3.88
Low-Income Units 0.88 1.56 1.74 0.84 1.55 1.79 2.97 4.92 1.70 4.31 14.86 14.00
Number of Bedrooms
b
12.68 10.06 10.22 7.37 13.47 12.67 11.36 11.25 2.81 3.41 11.68 13.32
Allocation Year 0.07 0.39 0.44 0.77 0.44 1.26 1.19 1.16 2.55 3.20 13.22 12.98
Construction Type (new/
rehab)
3.98 3.31 3.34 2.39 8.51 4.44 8.12 9.06 2.87 3.34 8.40 7.76
Nonprot Sponsorship 9.80 10.58 7.32 5.27 14.29 6.70 11.36 8.39 7.83 4.18 23.87 17.20
Use of Tax-Exempt Bonds 5.08 4.28 2.32 1.40 7.85 3.78 8.26 12.58 9.27 0.77 9.32 7.93
Use of RHS Section 515 14.81 11.68 5.80 4.99 11.84 9.62 20.48 13.07 8.94 13.50 41.19 34.40
Source: HUD National Low-Income Housing Tax Credit Database, 1987-2009.
Notes: Analysis included properties with data on placed in service year. Properties in Guam, Puerto Rico, and the Virgin Islands were
not included in analysis.
a
Indicates only that some location was provided. Address may not be a complete street address.
b
For some properties, bedroom count was provided for most but not all units, in which case data is not considered missing.
e percent of units with missing bedroom count data is based on properties where no data were provided on bedroom count.
APPENDIX E
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WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND?
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U.S. Department of Housing and Urban Development
Ofce of Policy Development and Research
Washington, DC 20410-6000
August 2012
